MicroStrategy Down 46% YTD, Will Get Margin Called if BTC Falls Below $21k
MicroStrategy, the business-intelligence software company that has shown exceptional interest in accumulating Bitcoin, has been performing poorly in the stock market. With the recent downturn in the crypto market, the company’s Bitcoin bet could be worrying.
The company’s shares are down around 46% year-to-date (YTD), even underperforming Bitcoin, which is down by around 30% YTD. However, this should not be MicroStrategy’s primary concern right now—as the company would face a margin call if Bitcoin extends its losses.
Microstrategy’s BTC-Collateralized Loan Puts the Company in a Tough Spot
Led by Bitcoin bull and MIT graduate Michael Saylor, MicroStrategy has been on a Bitcoin buying spree recently. The company, which started buying cryptocurrency for its balance sheet in August 2020, has even turned to loans to finance its Bitcoin purchases.
In late March, MicroStrategy borrowed $205 million from Silvergate Bank to buy more Bitcoin. The Bitcoin-backed loan was interest-only, meaning that the company has to pay only the interest for a certain period, with the principal left to be paid at the end of the term period.
However, the strategy of raising funds by taking loans collateralized by a speculative asset to buy more of that asset comes with one big risk: it can trigger a margin call if the price of Bitcoin falls below a certain level.
During the company’s first-quarter earnings call, MicroStrategy CFO Phong Le mentioned this, saying that the company will be forced to pony up more Bitcoin to back its loan with Silvergate Bank if the Bitcoin price drops below $21,000. He added:
“We took out the loan at a 25% LTV; the margin call occurs at 50% LTV. So essentially, Bitcoin needs to cut in half, or around $21,000, before we’d have a margin call.”
Le claimed that the company holds “quite a bit” of uncollateralized Bitcoin that it can use to support its loan should the need arise. He also noted that Bitcoin is highly unlikely to touch $21,000, a level that was last seen in late 2020.
“As you can see, we mentioned previously we have quite a bit of uncollateralized Bitcoin. So we have more that we could contribute in the case that we have a lot of downward volatility. But again, we’re talking about $21,000 before we get to a point where there needs to be more margin or more collateral contributors. So I think we’re in a pretty comfortable place where we are right now.”
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Microstrategy Holds More than 129,000 Bitcoins
In the first quarter of the year, Microstrategy purchased $215 million worth of Bitcoin at an average purchase price of $44,645 per coin, bringing its total holdings to 129,218 Bitcoins acquired at an average price of $30,700 per coin, or for $3.97 billion, according to SEC filings. At current rates, the company’s Bitcoin stash is worth over $4.2 billion.
Microstrategy’s plan to acquire more and more Bitcoin has helped the company’s shares closely follow the price of Bitcoin. This describes why the software company’s stock rose by more than 1,000% in 2021 when the flagship cryptocurrency sustained its rally.
However, with Bitcoin now performing poorly, Microstrategy is also in a bad position. The company’s shares are down around 46% YTD, even underperforming Bitcoin, which is down by around 30% YTD.
Notably, the crypto market has also been hit hard as the Fed tightening, surging interest rates and the risk of a recession continue to scare investors away. Over the weekend, the crypto market extended losses, with Bitcoin falling to $32,000, a level not seen since July 2021.
Do you think Bitcoin would ever see the $21,000 level again? Let us know in the comments below.