- Bitcoin price dropped below the cost basis of MicroStrategy, fear of margin call
- CEO Michael Saylor suggested MicroStrategy will not sell its bitcoin
- The firm has 115,109 BTC that are not obstructed by liens or potential defaults
- The company could pledge some other collateral for its bitcoin-backed loan
In addition to 115,109 unencumbered Bitcoin available, MicroStrategy could put up ‘some other collateral’ if needed according to latest investor brief. MicroStrategy took out a loan to purchase more bitcoin last month but the price fell below the approximate cost basis of $30.700.
Because Twitter is where most Bitcoin conversations take place, MicroStrategy CEO Michael Saylor tweeted on Tuesday morning following panic that his company would be forced to liquidate assets as a result of its bitcoin-backed loans.
Surly his hope was to quiet the alarm from stockholders and the general public as Bitcoin has continued its downwards trajectory on price, holding and fluctuating slightly around the $31,000 mark as of Wednesday.
MicroStrategy has held Bitcoin since August 2020.
And then in early April, the software analytics company borrowed $205 million to purchase even more bitcoin right as the price started to dip: this was its first-ever bitcoin-backed loan in which MicroStrategy bought 4,167 BTC for approximately $190.5 million, at an average price of about $45,714 per bitcoin.
Monday’s 11.6% drop in the price raised questions about whether the company might soon receive a margin call from Silvergate Bank, who lent MicroStrategy the money to make the purchase, which might add to Wall Street’s worries.
“MicroStrategy has a $205 million term loa“MicroStrategy has a $205M term loan and needs to maintain $410M as collateral,” Saylor posted on Twitter, and included a link to the company’s Q1 2022 investor presentation.
The tweet also said: “$MSTR has 115,109 BTC that it can pledge. If the price of #BTC falls below $3,562 the company could post some other collateral. See slides 11-12 in Q1 2022 presentation. #HODL”
While MicroStrategy owns 129,218 BTC, the company holds 115,109 BTC that are unencumbered and available to use as additional collateral if required.
With a $410 million collateral requirement in its loan, this amount of bitcoin would be enough to avoid a margin call if the bitcoin price sustained above $3,562.
Saylor added that the company wouldn’t sell even if that level got breached; however, if bitcoin falls below $21,000, the company will receive a margin call from one of its loans. But only one.
This is according to statements made by MicroStrategy CFO Phone Le who clarified these details during the company’s most recent earnings call (see link above).In other words, MicroStrategy is not at full risk.
According to Barron’s, stock in the cryptocurrency exchange Coinbase Global COIN –27.39% (ticker: COIN) fell 20% on Monday, and MicroStrategy MSTR –22.46% (MSTR),dropped 26%.
Bitcoin prices plunged 10% over the weekend to about $31,000, widening losses from after trading prices hovered around $36,000 on Friday.
“We’ve seen renewed selling in Bitcoin and the wider digital token market as the prospect of increasing interest rates and a deteriorating economic environment continues to weigh on risk assets,” said a team of analysts at Bitfinex in a note.
They added: “Investors exiting positions may be adding some momentum to the protracted sell off that we’ve witnessed over the past few days.”
For MicroStrategy, this has drawn attention to the potential for default on one of their loans; and as the price is nearing $21,000, MicroStrategy stock holders seem to be questioning the company’s bitcoin-investment strategy.
So, while public panic may grow, Saylor remains calm, hinting that the company will set aside more collateral for the loan as a stop gap measure rather than sell its bitcoin holdings.
And in addition to Saylor’s public statements on Twitter, this information is according to comments from Le, who was asked on MicroStrategy’s Quarterly earnings 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 replied.
In other words, Bitcoin would need to fall 36% from current levels to hit $21,000.
Basically, MicroStrategy isn’t going to be forced to sell its bitcoin, it’s just a single option should Bitcoin drop to $21,000. Of course, their other option, should bitcoin dip to $21,000, is to set aside some unencumbered bitcoin as collateral, but not sell, which is why Saylor is saying: we aren’t going to sell our bitcoin.
And who’s actually predicting it’s going to drop to $21,000 let alone below $4,000?
