MicroStrategy Stock Follows Bitcoin and Falls 25%

Microstrategy stock fell on Monday, June 14, by about 29% due to the ongoing meltdown in the crypto market amid another significant Bitcoin crash.
Shares of Microstrategy fell from $51.21 to $152.15 while losing 70% of their value due to investors’ fear over the impact of the brutal sell-off in the crypto market on the company’s finances.

MicroStrategy, a maker of business-intelligence software, adopts the use of Bitcoin in its operation to avoid the risk of inflation. The company has repeatedly increased its portfolios after adopting Bitcoin. In March, it acquired more Bitcoin from the $205m loans from Silvergate Capital’s Silvergate Bank. The company said it would face a margin call on that debt should the price of bitcoin drop to about $21,000.

On Monday, June 13, Bitcoin fell more than 12% to below $24,000, and the total market cap crippled below the $1 trillion level for the first time since February 2021. The crash came as investors predicted the risk of the Celsius Network freezing withdrawals, transfers, and swaps over the weekend due to extreme market conditions. Many crypto investors use Celsius for crypto staking and liquidity. So the operation halted by Celsius will profoundly impact the crypto market, with Bitcoin taking the most hits.

Pressure on MicroStrategy

MicroStrategy felt the Bitcoin crash pressure on Monday because it took out billions of dollars of debt to purchase bitcoin at higher prices. MicroStrategy owns nearly 130,000 bitcoin on its balance sheet, having purchased them at an average price of $30,700 over the past two years.

While bitcoin fell to $22,611 on the afternoon of June 13, the terms of MicroStrategy’s debt agreement came into focus for investors, some of whom had flocked to the company’s shares following its August 2020 announcement to adopt bitcoin as its “primary treasury reserve asset.”

And while MicroStrategy CEO Michael Saylor has repeatedly said he will never sell bitcoin, he may not have a choice if bitcoin keeps falling as it has recently, as the company faces a margin call on its bitcoin-backed loan if the cryptocurrency falls to $21,000. That would force the company to put up more collateral or sell some of its bitcoin.

In a recent mail to the Wall Street Journal, Michael Saylor said, “We don’t expect to receive a margin call, and the company has plenty of additional collateral should we need to post more.”

And according to MicroStrategy CFO Phone Le, on the company’s first-quarter earnings call, when he was asked, “how far does bitcoin have to fall for MicroStrategy to receive a margin call on the Silvergate loan?”

He answered, “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.” Bitcoin would need to fall 13% from current levels to hit $21,000.

From the collateralized loan of Microstrategy, its total bitcoin holdings are now worth just over $3 billion. But MicroStrategy is trading at a market valuation of just under $2 billion, meaning the stock is trading at a discount to its underlying crypto holdings.

This situation projects unrest from the investors due to its billions of dollars in debt, its slowly declining software business, and its exposure to a highly volatile asset.

Although, due to the significant crypto winter in March-May, MicroStrategy hasn’t been shy in buying more bitcoin. However, that may not be an option anymore as it becomes stretched thin with leverage, and investor confidence in crypto deteriorates, making it harder for the company to raise more debt to buy crypto.