When MicroStrategy (MSTR) released its latest earnings report, the press and crypto Twitter were awash with speculation on its Bitcoin margin call. Only, why is it so important where this obscure company gets potentially margin called?
MicroStrategy offers analytics services to businesses through its software, but shot to fame outside of that market when Michael Saylor, its founder and major shareholder, gambled his company all-in on Bitcoin.
In fact, MSTR appears to be the second biggest corporate Bitcoin holder after Grayscale Trust. As the crypto market entered deep bear territory this year, Saylor’s mega Bitcoin bet raised even more questions — while also offering insight into the vulnerability of the Bitcoin market.
A brief history of MicroStrategy’s Bitcoin buying
A quick look at MicroStrategy’s numbers reveal that Michael Saylor’s margin call may be much higher than what he would like to admit. Bloomberg described MicroStrategy’s BTC buying as a levered play on Bitcoin.
With revenues nowhere near the debt that MSTR is incurring to buy Bitcoin, it’s clear that Saylor turned his humble analytics software business into a deeply leveraged company with huge bets at the Crypto Casino.
And naturally in the crypto world, this explains why MSTR has become so popular. With a market cap of $1.44 billion in 2019 and revenues of around $486 million, MSTR barely featured in the news-cycle.
However, as its BTC holdings engulfed the value of its software business, MSTR quickly became more about Bitcoin than software. There is at this point no other company in the New York Stock Exchange which is as exposed to BTC as MSTR.
This doesn’t necessarily mean that owning MicroStrategy as a stock will give you an equivalent exposure to Bitcoin’s price – because the company’s stock is being heavily diluted to buy more BTC.
MicroStrategy started buying Bitcoin in August 2020 from its sale of $250 million in stock and then continued buying BTC by issuing unsecured notes which could be converted into shares. Adding to this new financial debt, MSTR issued a bond, took a loan, and sold more shares to buy BTC.
Read more: MicroStrategy’s margin call explained
It had no debts in 2018, registered a debt of $113 million in 2019, but after starting to accumulate its BTC debt in 2020, it registered $581.5 million in debt. Today, MicroStrategy’s total debt runs as much as $2.435 billion.
If revenues and income remain at their current level, Saylor will inevitably have to sell some of his BTC to cover his loan and pay off bond-holders, whatever the price Bitcoin may be – on top of the excessive dilution of the stock-price that will come once the unsecured notes start getting redeemed.
Most of the Bitcoin debt MicroStrategy has is in unsecured debt they released in 2020, with $650 million at 0.75% maturing in 2025 and in 2021 $1.05 billion at 0% maturing in 2027. In 2021 MicroStrategy also released $500 million in secured bonds at 6.125% maturing in 2028.
In March this year, MicroStrategy took a $205 million loan from Silvergate collateralized with BTC to purchase around 4,000 more BTC. Though, it is interesting to note that the interest rate payment for this loan has not yet been declared.
Purchases of Bitcoin were also funded by the sale of 1,413,767 shares in 2021 at roughly slightly higher than $700 per share, raking up around $1 billion in sales. Since 2019, the shares outstanding of MicroStrategy increased by 12.6%. They will be increasing by even more.
In total, MicroStrategy bought 129,218 of Bitcoin for a total price of $3.97 billion and an average purchase price per Bitcoin of approximately $30,700.
In 2021, MicroStrategy made a final cash profit of $93.8 million, relatively being their third best year in their last ten years. Revenue and income have trended down since 2015 but increased in 2021. Saylor’s fame coincided with slightly better cash flows and revenues, but even being Twitter famous wasn’t enough to make his company debts sustainable.
Low ratings mean pressure on the stock
Altman Z-Score, an analytics indicator used by fund managers, rates MicroStrategy at -0.06, indicating it is in “Distress Zones.” This basically means MicroStrategy may face the possibility of bankruptcy in the next two years.
Logically, if the price of Bitcoin remains below the average purchase price of MSTR, the company would inevitably go bankrupt because its BTC would not be enough to pay down debts. Its stock, which is highly correlated to Bitcoin, would plummet and the unsecured notes would become worthless.
On the other hand, if Bitcoin goes back to $60,000 and more, MSTR would be able to make a profit if it sells its Bitcoin and the market values the stock-price high enough for the holders of the unsecured notes to cash out with a profit. However, even this scenario would require BTC to be in constant demand at higher price-levels.
Simply put, MSTR has a lot of BTC to offload and, for the company to survive, it needs a prolonged BTC bull market where buyers keep seeking ever higher prices.
As of 2020, BTC made a return of 763% while MicroStrategy lagged behind at 69%. The Nasdaq made a return of 83.66%. The market cap of the company ($2.5 billion) is also significantly less than the value of the company’s BTC holdings, around $3.7 billion.
Saylor’s quick trajectory into a high-stakes BTC gambler happened very fast. Now, he’s stuck in his position without being able to change course.
Initially, in 2020, MicroStrategy’s annual report outlining its decision to purchase BTC didn’t mention the speculative aspect behind the idealist and long-term goal of Bitcoin becoming a global and monetary store of value.
As of 2021, MicroStrategy upped the ante on its Bitcoin rationale, arguing the crypto was an inflation hedge:
“Corporations with excess capital and cash reserves on their balance sheet are not protecting shareholder value. We believe that bitcoin fixes that.”
“Exogenous forces of inflation, regulation, confrontation, corruption, coercion, or confiscation can put the future of any organization at risk. We believe that bitcoin fixes that, too.”
Today, the argument that Bitcoin is the best inflation hedge has become Michael Saylor’s most important talking point on Bitcoin. However, reality has interceded, showing that BTC and inflation are not negatively correlated.
Saylor’s other main argument here is based on a principle of social justice, saying that monetary and fiscal policies were overly beneficial to people who owned assets such as stocks rather than for the people who depend on their monthly paycheck.
The negative correlation between Bitcoin and inflation may well be because of the same monetary policy that Saylor argued helped bring economic and income inequality. The dialectical nuance here is interesting, because if BTC was the best kind of inflation hedge, and its success depended on low-interest rates and easy access to capital, it’s as if expansionist monetary policy has also provided its own antidote.
Low interest rates: nice to have, or must have?
Some correlation exists between risk-on assets like Tesla stock with Bitcoin, which are allegedly also helped by a low-interest rate monetary regime. In 2021, Bitcoin and Tesla surged together to new exponential highs.
Ironically, Tesla outperformed Bitcoin from 2020 as of now. So, with Saylor’s similar logic, people could have also hedged for inflation by buying risky stocks.
One is yet to see how risk-on stocks like Tesla will fare in a higher interest rate environment, but it will be even more interesting with Bitcoin. A chart published by Market Ear plotting the inverted pattern of the GS US Financial Index with the Bitcoin price shows a steady correlation.
Worse for Saylor is that he may be his own worst enemy. If he blows-up, how would his BTC offloading affect the market and Bitcoin’s price?
The other major potential risk in this scenario is Grayscale Trust. How much damage would the market incur if Grayscale Trust and MSTR blow up? Suddenly, those who purchased Bitcoin for the idealistic end of being independent from major money and financial players have found themselves with an asset backed by two whales who may crash the market on their whim.
Ultimately, Bitcoiners have no choice but to hope that Saylor’s bet succeeds.