MicroStrategy’s subsidiary takes on a $205 million loan to buy more Bitcoin

MicroStrategy’s subsidiary takes on a $205 million loan to buy more Bitcoin
  • MicroStrategy subsidiary MacroStrategy has taken on a loan of $205 million from Silvergate Bank to buy more Bitcoin.
  • MacroStrategy currently has 110,000 Bitcoin in its reserves.
  • A sharp fall in the cryptocurrency’s price could lead to complications in paying back the loan and the valuation of both companies.
MacroStrategy, the newly formed subsidiary of MicroStrategy that holds most of its parent company’s Bitcoin, has taken out a loan of $205 million to buy more Bitcoin.

The three-year loan is backed by the $820 million worth of Bitcoin that MacroStrategy already has in its reserves, according to the company’s filing with the US Securities and Exchange Commission (SEC). While that may seem like a large amount, it only accounts for around 12% of MicroStrategy’s overall cryptocurrency holdings.

At least $410 million needs to be held as collateral. The custodian of the large amount is unnamed but mutually authorised by both the company and crypto-focused Silvergate Bank. The remaining $205 million will remain with the company for spending.

Using the capital from the loan, we've effectively turned our bitcoin into productive collateral, which allows us to further execute against our business strategy

MicroStrategy CEO and chairman Michael Saylor

As things stand, MicroStrategy has spent around $3.8 billion buying Bitcoin. On paper, it has a profit of $2 billion at current prices.

What could go wrong?

The complication with a loan like this is that if Bitcoin’s price were to fall sharply, the entire company’s valuation would suffer. Moreover, the firm would struggle to pay its debt since the collateral and the new purchase of Bitcoin would lose value.

After the disclosure, the company’s market value slipped by 0.6% before correcting. Overall, the shares of MicroStrategy have witnessed a 9% drop since the beginning of the year. Meanwhile, the price of Bitcoin saw an uptick of 1%.

MicroStrategy is the largest corporate Bitcoin holder in the world
Michael Saylor’s MicroStrategy ventured into crypto investments when it bought its first Bitcoin in August 2020. Two years later, the company has accumulated 125,051 Bitcoin valued at $6 billion as per current prices.

Most of that — 110,000 Bitcoin — is now with MacroStrategy, which was created in June 2020. Using the $205 million loan, MacroStrategy will buy more Bitcoin, pay interest and expenses on the loan transaction, and for general business expenses.

The new funds have come at a time when many market analysts are predicting that Bitcoin’s price is likely to hit $50,000 sometime soon.

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