MicroStrategy now has more than 129,000 Bitcoin, since the software company bought the cryptocurrency with debt in 2020.
However, the strategy of raising more debt than $2 billion to purchase speculative assets has one major risk: It can trigger a margin-call if bitcoin’s price falls below a certain point.
Phong Le, MicroStrategy’s chief financial officer, stated in Tuesday’s earnings call that if bitcoin falls to $21,000, it would have to make a margin call. This would be a 46% drop from the current level.
MicroStrategy was asked by the caller, “How far does Bitcoin have to fall in order for MicroStrategy receive a margin call from the Silvergate Loan?”
“As far as bitcoin’s future direction, we borrowed the loan at 25% loan-to value, and the margin call is [at] 50% loan to value. Le stated that bitcoin must be cut in half, or approximately $21,000, before we can make a margin call.
MicroStrategy may not have to sell its bitcoin for less than what it paid when it adds collateral to its loan. “Before it reaches 50%, we could add more bitcoin to the collateral package so that it never gets there. So we don’t get into a position of a margin call.”
In March, MicroStrategy took out a $205 million bitcoin-collateralized loan with Silvergate Bank to purchase more bitcoin. The average cost basis for the software company’s bitcoin holdings is about $30,700. CEO Michael Saylor stated earlier this year that he does not plan to sell MicroStrategy’s bitcoin stash.
MicroStrategy trades at a $4.4 billion market valuation, which means the stock is trading at an undervalued discount to its crypto holdings. This signals that investors might be uneasy about its billions in debt, its slowing software business and its exposures to volatile assets.
MicroStrategy’s stock prices have closely mirrored bitcoin’s, to the point that some consider it an ETF quasi-bitcoin, since there is no bitcoin ETF approved in the US.
MicroStrategy’s stock prices are currently affected by the bitcoin price. This is 44% lower than November’s record high of $69,000. MicroStrategy stock has fallen 62% since November’s bitcoin peak and is down 37% over the past year.