Microstrategy’S Bitcoin Holding Shrinks By $1 Billion Amid Crypto Meltdown, And The Software Firm Is Not Alone
Bitcoin prices have been plummeting with no signs of bouncing back any time soon. The cryptocurrency has dived from its all-time high of $69,000 in November 2021 to $20,524 at the time of writing, translating to a staggering 70 percent loss.
This has put Bitcoin bulls like Tesla, MicroStrategy, Block in a precarious position. They all made large Bitcoin purchases over time, believing that it would help them hedge risk against inflation. Ironically, soaring inflation rates are actually contributing to plummeting crypto prices.
MicroStrategy commenced Bitcoin buying in August 2020, when the Bitcoin price was still below $12,000. Over the years, the firm has added to its Bitcoin holding at an average price of $30,700, as of March 31. In all, the software firm has acquired approximately 130,000 BTCs for a total of nearly $4 billion.
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However, the current crypto meltdown has caused MicroStrategy’s Bitcoin holding to shrink in value. It is now valued at $2.7 billion at the time of writing, resulting in a net loss of nearly $1.3 billion.
What’s worse is that MicroStrategy expanded its coffers and added $215 million worth of Bitcoin at an average price of $44,645 in Q1 2022. This purchase was funded by a loan from Silvergate Bank which was also accompanied by a margin call. As per the terms of the loan, if Bitcoin prices fall below the $21,000 mark, MicroStrategy will be forced to cough up the loan amount and return it promptly.
“We took out the loan at a 25 percent LTV; the margin call occurs at 50 percent LTV. So essentially, Bitcoin needs to cut in half, or around $21,000, before we’d have a margin call,” explained MicroStrategy chief financial officer Phong Le in the firm’s Q1 earnings call.
However, company boss Michael Saylor had brushed aside this concern early in May and said the margin call would become a problem only if Bitcoin fell as low as $3,562. “MicroStrategy has a $205 million term loan and needs to maintain $410 million as collateral. $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,” he tweeted on May 10, 2022.
What’s more, is that the $205 million Silvergate Bank loan is also collateralised by Bitcoin. Using borrowed money backed by an asset to buy more of the same asset is never a good idea. However, Le claims that MicroStrategy is sitting on 95,643 “unencumbered Bitcoin” and is now comfortable in its position.
Elon Musk’s Tesla is also looking at a heavy unrealised loss. With about 42,000 BTC in its reserves, Business Insider estimates that the approximate loss could be to the tune of $399.8 million. Jack Dorsey’s Block is sitting on 8,027 BTC, which is estimated to have accrued a loss of about $42.6 million.
Bitcoin’s meteoric rise between Q4 2020 and Q3 2021 was also catered by a 3-month long correction from May 2021 to July 2021. During the period, two key events transpired. Tesla boss Elon Musk tweeted about the “insane” energy consumption of Bitcoin, causing prices to slump from over $55,000 to below $50,000.
Following this, the Chinese authorities cracked down on Bitcoin miners and dealt a severe blow to the industry, triggering a free fall in Bitcoin prices that eventually sunk to $30,000. These events also wiped out a large share of the value of Tesla’s Bitcoin holdings, which were worth $1.5 billion in February 2021. History now seems to be repeating itself with a much deeper trough on the charts and more agony.
First Published: IST
