MicroStrategy Could See A WallStreetBets ‘Margin Call From Hell’ If Bitcoin Falls Below This Level
One man is looking at the Bitcoin price (this morning only around $33k) and is praying more than anyone else that things will change for the better.
Michael Saylor is a hero to the Bitcoin community. Recently, at Bitcoin 2022 Miami—the largest Bitcoin event worldwide—Saylor was met by thousands of cheering fans as he instructed the crowd to never sell their crypto. This is because his company MicroStrategy was one of the first to start stockpiling the world’s biggest cryptocurrency back in August 2020.
Egged on by the rising price of Bitcoin since then (it traded around $10,000 at the time) and cheered by most of the so-called ‘Bitcoin maxis’ (influencers who are convinced Bitcoin will one day trade above $100k), he started accumulating ever more Bitcoin and even took out loans.
Imagine how awkward it will be for Saylor when he’s eventually margin called later this year.— CryptoWhale (@CryptoWhale) May 8, 2022
He can no longer talk about Bitcoin as he will be a no coiner. Ouch.
Now, as margin calls could come in if Bitcoin falls below certain levels, MicroStrategy could see a repeat of it’s 2000 Dotcom debacle.
The margin call from hell
Saylor has been here before. Back in 2000, his company promised Wall Street mountains of gold and everlasting riches. In the end, MicroStrategy left the DotCom bubble with a $13 billion loss.
Rumors claim @MicroStrategy has 26K as a bearish limit where they will need to get rid of 30% of their #Bitcoin to cover loans. It could lead to a disastrous downfall to 16K, reaching this #fibonacci mid target. https://t.co/QYhSDt1zYX.#crypto #cryptocurrency— Lúcio J. P. Filho ∴ 🇧🇷 🇺🇲 🇪🇸 (@luciojpfilho) May 8, 2022
Now, Saylor’s belief in the ever-growing value of Bitcoin has made him take quite a risky bet, as his CFO Phong Le admitted during a first-quarter earnings call last week that the company took out a hefty loan (some $200 million dollars) to buy more Bitcoin, a loan that is backed by Bitcoin.
We took out the loan at a 25% LTV; the margin call occurs at 50% LTV, CFO Le said. So essentially, Bitcoin needs to cut in half, or around $21,000, before we’d have a margin call. As you can see, we mentioned previously we have quite a bit of uncollateralized Bitcoin.
In essence, if Bitcoin’s price falls, MicroStrategy will be forced to pay more interest on the loan because of the Loan to Value (LTV) figures that Saylor accepted.
The CFO admitted this was the case, stating:
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.
MicroStrategy’s CFO Phong Le explained in the company’s first-quarter earnings call on Tuesday that if Bitcoin’s price falls below $21,000, or around 50% from current levels, it will be forced to pony up more cryptocurrency to back its $205 million Bitcoin-collateralized loan— Hex_is_the_way (@hex_is_the_way) May 6, 2022
It’s true that we’re still a long way of from $21,000 per Bitcoin. Then again, hedge fund Melvin capital bet against GameStop last year and was met by WallStreetBets investors who understood pretty well how margin calls work. Melvin Capital’s Gabe Plotkin is still trying to recoup that $6.8 billion loss from what has become known as the ‘margin call from hell’.
Let’s hope it’s works out better for MicroStrategy.
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