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Michael Saylor – CEO of MicroStrategy – recently expanded on his company’s newly established, Bitcoin collateralized loan with Silvergate bank. He suggested that the loan was his company’s next best option besides Bitcoin-backed bonds. However, he doesn’t believe financial markets are ready yet for such a product.
The Loan vs. the Bond
MicroStrategy is the largest individual holder of circulating Bitcoin in the world (with the possible exception of one mystery whale). On Friday, the company resumed its efforts to purchase Bitcoin after nearly two months without adding to its reserves.
However, the new move was a premiere. The company’s subsidiary company, MacroStrategy, closed a $205 million Bitcoin-backed loan with Silvergate to buy even more Bitcoin. In other words, he is effectively buying Bitcoin with leverage, and is exposed to liquidation if the price falls too much.
Saylor claims this was the best possible course of action for shareholders. Some of the other options included lending out MicroStrategy’s existing Bitcoin, using DeFi, or selling Bitcoin-backed bonds.
“I’d love to see a day where people eventually sell Bitcoin-backed bonds like mortgage-backed securities,” said Saylor. “The market is not quite ready for that right now. The next best idea was a term loan from a major bank.”
The CEO elaborated that if a company with JP Morgan’s balance sheet was offering the same product, it might work. However, from his company and most others, a bond like that would likely carry “theoretical counterparty risk offsetting nominal yield.”
El Salvador, the first nation to make Bitcoin legal tender, soon plans to offer a similar Bitcoin bond. Half of the bond’s proceeds will go towards Bitcoin purchases and the other half towards Bitcoin mining infrastructure. However, President Bukele says the bond’s launch has been delayed due to the prioritization of internal pension reform.
“There’s a lot of talk about the El Salvador Bitcoin bond,” Saylor said on the topic. “That’s a hybrid sovereign debt instrument as opposed to a pure Bitcoin-treasury play. That has its own credit risk and has nothing to do with the Bitcoin risk itself entirely.”
A Good Time to Buy?
MicroStrategy’s deal comes at a time of bullish resurgence in the crypto markets. After Terra announced its plan to purchase $10 billion in Bitcoin for its reserves, prices have broken months-long resistance. Should their purchases continue apace, their reserves will outstrip MicroStrategy’s, worth $5.9 billion at Bitcoin’s current price.
Saylor even encourages others to leverage Bitcoin, given the circumstances. He argues that while the asset is yielding over 50% per year, debt currently costs less than 2%.
“At every scale anybody can readily use Bitcoin as their fulcrum and leverage is plentifully available to every corporation in the world right now. Municipalities could do it,” he said.