The biggest corporate holder of bitcoin is facing a reckoning

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MicroStrategy is famous for owning more bitcoin than any other publicly-traded company. As of June 14, the Virginia-based business intelligence company holds 129,218 bitcoins, more than two-and-a-half times as much as Tesla, the next largest bitcoin owner. That bitcoin is now worth about $2.9 billion, less than half of the roughly $6 billion it was worth just two months ago.

MicroStrategy chief Michael Saylor believes so deeply in the promise of the primordial cryptocurrency that the company took out a $205 million loan from Silvergate Bank to buy $190 million worth of bitcoin in April. But since then, the cryptocurrency market, which was already slumping, has gone into free fall.

“Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” MicroStrategy president Phong Les said in May during an earnings call. But that’s exactly what happened. In the two months since MicroStrategy’s latest bitcoin purchase, the cryptocurrency lost more than half of its value. As of June 14, MicroStrategy has lost $1.1 billion on its bitcoin bet and now may have to post more collateral on their loan.

According to the terms of MicroStrategy’s loan agreement with Silvergate Bank, a margin call could be triggered if bitcoin falls below $21,000 per coin—which, depending on your data source, it might have already done. The website CoinGecko clocked bitcoin’s low at $21,046.95 around 10pm Eastern on June 13, but Bloomberg reported the low at $20,824.

MicroStrategy did not respond to a request for comment and a spokesperson for Silvergate Bank declined to comment for this story.

While it’s unclear whether or not the margin call will happen, MicroStrategy’s response to the bitcoin downturn could augur how a broader set of companies that have muddled their finances with crypto, including Tesla, will navigate the ongoing “crypto winter.”

MicroStrategy’s bitcoin bet

MicroStrategy, which launched in 1989 and develops data mining tools to help businesses make decisions, bought its first 21,454 bitcoins for $250 million in August 2020, citing worries the US dollar would lose value due to the pandemic, government stimulus spending, and political uncertainty around the world. “This investment reflects our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash,” Saylor wrote in a statement at the time.

MicroStrategy wasn’t the only publicly traded company to bet on bitcoin. The Jack Dorsey-run payments company Block (then called Square) bought $50 million in bitcoin in October 2020 as “a hedge” against market downturns, and Elon Musk’s Tesla bought $1.5 billion worth of bitcoin by February 2021 to give itself “more flexibility to further diversify and maximize returns on our cash,” according to an SEC filing.

But no other company has invested in cryptocurrencies as aggressively as MicroStrategy. The company bought more than $1 billion by the end of 2020 and then, after bitcoin’s price surged above $50,000 for the first time in February 2021, it bought another $1 billion in a single day. In a statement announcing the purchase, Saylor said MicroStrategy had two corporate strategies of similar importance: “growing our enterprise analytics software business and acquiring and holding bitcoin.”

MicroStrategy has now spent more than $4 billion on bitcoin—which is more than twice as much as the company’s $1.7 billion market capitalization. Along the way, MicroStrategy transformed itself from a middling software company into a stock-trader vehicle to speculate on the future value of bitcoin.

Unfortunately for MicroStrategy, it made the bulk of its bitcoin purchases as crypto markets neared their peak. Plus, institutional investors have piled into the crypto market, linking the fate of bitcoin with trends in traditional financial markets; as a result, cryptocurrencies have turned out to be a lousy hedge against inflation and market turmoil. As of June 14, MicroStrategy’s crypto horde is worth about $1.1 billion less than what the company paid for it.

But even as bitcoin has tumbled, MicroStrategy has continued to invest. “Our strategy with bitcoin has been to buy and hold, so to the extent we have excess cash flows or we find other ways to raise money, we continue to put it into bitcoin,” chief financial officer Phong Le told the Wall Street Journal in January.

Will MicroStrategy face a margin call?

This week, Saylor told the Journal he doesn’t think a margin call will happen, but caveated that “the company has plenty of additional collateral should we need to post more.” In a June 14 tweet, Saylor said MicroStrategy has anticipated volatility and “structured its balance sheet so that it could continue to #HODL through adversity.”

Mark Palmer, an equity research analyst at the financial services firm BTIG, told Reuters he sees “no circumstance in which MicroStrategy is going to need to sell any of its bitcoin holdings.” Palmer said that, if needed, MicroStrategy has enough “unencumbered bitcoin” to post as additional collateral.

MicroStrategy’s bitcoin bet, which once helped the stock jump nearly 10-times its value between February 2020 and February 2021, has now dragged it down. The stock’s price fell 72% in the last six months, though it rose 1.5% on June 14 despite the specter of a margin call. In the long run, it seems MicroStrategy’s fate appears more tethered to the caprices of bitcoin, an unregulated and highly volatile alternative currency, than to the company’s core business.

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