MicroStrategy Takes $205M Bitcoin-Backed Loan to Buy More Bitcoin
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MicroStrategy Takes $205M Bitcoin-Backed Loan to Buy More Bitcoin

MicroStrategy's BTC-backed interest-only loan was issued by Silvergate Bank's SEN Leverage platform.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

The world’s biggest corporate Bitcoin evangelist, Michael Saylor, is maximizing MicroStrategy’s already substantial holdings of 125,051 bitcoins (~$6 billion). As of March 29th, Silvergate Bank issued a $205 million loan to MacroStrategy, a subsidiary of MicroStrategy.

The loan is not only collateralized by bitcoins but it will also be used to buy more of them.

Silvergate Bank’s SEN Leverage Issued Bitcoin-Backed Loan to MicroStrategy’s Subsidiary

The issued loan is interest-only, which means that MacroStrategy has to pay only the interest for a certain period, with the principal left likely to be paid at the end of the term period. Such loans are often used with mortgages where the borrowers have outstanding credit ratings, significant assets, and a short-term outlook between 5 to 10 years.

Therefore, as premium loans, they exert low monthly payments because the borrower is not considered at risk. Silvergate certainly deemed it so with its largest single loan yet, collateralized by BTC.

Over the last few years, Silvergate Bank, a subsidiary of Silvergate Capital, has integrated traditional banking with crypto assets. In 2020,  the Federal Reserve member bank launched a platform for institutional crypto investors called SEN Leverage, providing USD-based loans collateralized by Bitcoin.

Up to the end of 2021, Silvergate’s SEN issued $570.5 million worth of such loans. This makes Michael Saylor’s single loan 36% of the bank’s total commitments, which is not surprising given that Michael Saylor is one of the biggest Bitcoin whales, currently holding 125k BTC.

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MicroStrategy’s Business Model Linked to Bitcoin’s Performance

When banks issue loans, their primary concern is looking at the client’s repayment capability. In the case of institutional clients, this would be their debt-to-income ratio. It is calculated by dividing the company’s total liabilities by its shareholder’s equity. MicroStrategy has a long-term debt of $2.58 billion, while the shareholder’s equity is at $0.98 billion, leaving the debt-to-equity (D/B) ratio at 2.63.

This means that for every dollar invested in MicroStrategy, 62 cents comes from its debt. However, Michael Saylor has a lax view of what it means to be leveraged. In an interview with CNBC last July, he noted the following:

“If you borrow billions of dollars at 1% interest and invest it in the next Big Tech digital network that you thought was going to be the dominant Amazon or Google or Facebook of money, why wouldn’t you?”

Those who have been following Michael Saylor’s Twitter account know that the “next Big Tech digital network” he is talking about is Bitcoin. While BTC is not a product in the traditional sense, it is a borderless, decentralized payment service that is highly resistant to bans and money supply manipulation. Or, as Saylor likens it, a private virtual bank.

By going all-in on Bitcoin, Saylor’s MicroStrategy fate is now intrinsically linked to Bitcoin’s price moves. Accordingly, MSTR stock so far is down by 19.27% over the last 12 months.

MSTR vs. BTC over one year. Image credit: Trading View

Nonetheless, Michael Saylor is holding a long-term view, which is quite common among Bitcoin investors. He noted on CNBC’s Squawk as much last summer.

“Our point of view is being a leveraged, bitcoin-long company is a good thing for our shareholders.”

In other words, the bet is that Bitcoin’s appreciation will outstrip any incurred debt. Currently holding 125,051 bitcoins, the last time MicroStrategy purchased BTC was at the end of 2021, worth $25 million (660 BTC) at $37,865 per BTC.

Since then, Bitcoin rallied by 25%, to $47.5k at press time. In the short term, it appears that the bet is paying off. In the wake of sanctions against Russia, the gains may even accelerate.

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If MicroStrategy’s future is tied to Bitcoin, do you think it will become as wealthy as Apple? Let us know in the comments below.