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Jun 14, 2022

MicroStrategy's Bitcoin-backed loan risks margin call amid fall

First Look With Surveillance: Market Rebound, Crypto

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MicroStrategy Inc. may need to post additional collateral for a Bitcoin-backed loan as the price of the world’s largest cryptocurrency tests a key price level of US$21,000 flagged by the company.

The software firm controlled by Bitcoin advocate Michael Saylor had used its vast Bitcoin holdings to secure a US$205 million loan in March to buy even more cryptocurrency. But as the value of that collateral initially worth around US$820 million falls to about half that, the company may need to provide more capital to back the loan.

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MicroStrategy has become closely linked with Bitcoin, after it was one of the first major companies to buy the tokens for its corporate treasury, effectively making its stock a proxy for the cryptocurrency. Saylor, the company’s chief executive officer, frequently touts crypto on social media and at conferences -- including a tweet on Monday amid the selloff saying “In #Bitcoin We Trust.” 

But the firm’s bet in the token has backfired as of late with paper losses on the firm’s digital holdings approaching US$1 billion, after it paid nearly US$4 billion to amass about 130,000 Bitcoins over the last two years, according to a company filing.

A MicroStrategy spokesman didn’t immediately respond to an email sent outside regular office hours. In May, Phong Le, MicroStrategy’s president, said on a call Bitcoin would need to reach around US$21,000 before the company would have a margin call. But that before it got to that level, the company could “contribute more Bitcoin to the collateral package, so it never gets there.”

 

A BTIG analyst said concerns about a margin call were overblown as about 96,000 of the company’s tokens are still available for MicroStrategy to post as additional collateral.

Shares of MicroStrategy were modestly higher Tuesday, following a 25 per cent plunge to the lowest level since 2020 on Monday. Bitcoin traded at roughly US$22,000 after falling as low as US$20,800 earlier in the day.