- MicroStrategy said it would face a margin call on some of its bitcoin holdings if the crypto falls to $21,000.
- MicroStrategy has amassed more than 129,000 bitcoin with a value of more than $5 billion.
- MicroStrategy has raised more than $2 billion in debt to buy its bitcoin holdings at an average price of $30,700.
But the strategy of raising more than $2 billion in debt to buy a speculative asset has one big risk: it can trigger a margin call if the price of bitcoin falls below a certain level.
On Tuesday, MicroStrategy CFO Phong Le outlined in the company’s first-quarter earnings call that it would face a margin call if bitcoin fell to $21,000, which would represent a decline of 46% from current levels.
MicroStrategy was asked during the call, “how far does bitcoin have to fall for MicroStrategy to receive a margin call on the Silvergate loan?”
“As far as where bitcoin needs to fall, we took out the loan at a 25% loan-to-value, the margin call occurs [at] 50% loan-to-value. So essentially, bitcoin needs to cut in half or around $21,000 before we’d have a margin call,” Le said.
MicroStrategy could avoid being forced to sell its bitcoin at a lower price than it bought it if the company adds more collateral to its loan, he said. “Before it gets to 50%, we could contribute more bitcoin to the collateral package, so it never gets there, so we don’t ever get into a situation of a margin call.”
In March, MicroStrategy took out a $205 million bitcoin-collateralized loan with Silvergate Bank to purchase more bitcoin. The software company’s total bitcoin holdings are now worth more than $5 billion and have an average cost basis of about $30,700. Earlier this year, CEO Michael Saylor said he doesn’t plan to ever sell MicroStrategy’s bitcoin stash.
But MicroStrategy is trading at a market valuation of only $4.4 billion, meaning the stock is trading at a discount to its underlying crypto holdings, signaling that investors may be somewhat uneasy with its billions of dollars in debt, its slowly declining software business, and its exposure to a extremely volatile asset.
Additionally, MicroStrategy’s stock price has closely mirrored the price of bitcoin to the point where some consider it a quasi-bitcoin ETF, as there is no true bitcoin ETF yet approved in the US.
For now, MicroStrategy’s stock price lives or dies based on the price of bitcoin, which is down 44% from its record high of $69,000 in November. MicroStrategy stock is down 62% since bitcoin topped out in November, and is down 37% year-to-date.