Bitcoin evangelist Michael Saylor and his company MicroStrategy (MSTR) are once again in the public spotlight in light of the several bankruptcy cases. Since part of the software company's enormous Bitcoin position is leveraged, fears of a potential liquidation are being raised.
MicroStrategy owns 129,218 Bitcoin (BTC), a few thousand of which were acquired in the first quarter of 2022. In total, the company has spent about $3.97 billion on its Bitcoins. After skyrocketing during the cryptocurrency's meteoric rise last November, the company's Bitcoin holdings are now valued at $2.6 billion, according to Bitcoin Treasuries. Saylor's bet on Bitcoin thus represents a loss of around 30% (1.4 billion), with part of the investment financed with external loans. Is there a chance of a forced sale?
So far no margin call for the bitcoin loan
MicroStrategy did not buy most of the bitcoin with its own money; the company borrowed much of it. A March loan and security agreement with Silvergate Bank issued a $205 million note to MicroStrategy. The secured loan matures in March 2025, unless repaid or redeemed earlier according to its terms. This loan is secured by Bitcoin held in custody with a third party. MicroStrategy is required to maintain a loan to collateral value ratio ("LTV Ratio") of 50% or less. However, this is the only position at risk of liquidation.
"We only have a $205 million loan that we need to collateralize, and it's 10 times overcollateralized right now. If the market were to fall by a factor of 10, we would have cash and we would generate cash flow, so the margin call is much ado about nothing." - Michael Saylor, CEO of MicroStrategy
Saylor recently gave an interview to Bloomberg and CNBC about his positions and the rumors of a MicroStrategy margin call. Although Bitcoin is currently more than 70% away from its all-time high, the CEO seems to remain positive about his Bitcoin bet. Saylor remains confident that the illustrative Bitcoin investment was the best use of the company's cash reserves. When asked if the current market offers a good buying opportunity, Saylor simply replied, "Absolutely."
Much wind about nothing
With the minimal leverage, the company's reserves should therefore basically be safe. Indeed, the bulk of the Bitcoin investment was financed with convertible bonds maturing in 2025 and 2027. These were issued at an interest rate of 0 to 0.75% and amount to USD 1.75 billion. In contrast to the Bitcoin loan, there is no margin call.
This allows Saylor to focus on long-term developments. With a shorter time horizon, even the bitcoin evangelist admits that bitcoin behaves like a volatile risk asset. But if the time frame is 10 years, he believes the cryptocurrency represents a risk-free value investment. Thus, a liquidation of the company's multi-billion dollar Bitcoin position should be extremely remote.
My @BloombergTV discussion with @emilychangtv includes a post-mortem on @MicroStrategy’s #Bitcoin Strategy and a review of the top ten hurdles that the industry must overcome as it crosses the chasm and achieves mainstream adoption. pic.twitter.com/Ujid4m1pxe
— Michael Saylor⚡️ (@saylor) June 17, 2022
