MicroStrategy risks a margin call

Yesterday was a black day for MicroStrategy, which risks a margin call due to the collapse in the price of Bitcoin.

Bitcoin in the red, MicroStrategy close to a margin call 

While Bitcoin’s price lost 12%, MicroStrategy’s share price marked -25%. 

The problem is not only the drop in the price of Bitcoin per se, to which MicroStrategy shares are now obviously correlated, but especially the risk of suffering a margin call. 

The fact is that a few days ago the president and CFP of the company, Phong Le, had stated that in case the price of Bitcoin falls to $21,000 it would trigger a margin call. 

To be precise he said: 

“As far as where Bitcoin needs to fall, we took out the loan at a 25% LTV, the margin call occurs 50% LTV. So essentially, Bitcoin needs to cut in half or around $21,000 before we’d have a margin call. That said, before it gets to 50%, we could contribute more Bitcoin to the collateral package, so it never gets there, so we don’t ever get into a situation of March call also”.

Although the current situation still seems decidedly far from what Le described, investors panicked yesterday and sold MicroStrategy shares out of fear of taking big losses. 

Yesterday at the opening of the US markets, the price of BTC was just under $33,000, and over the course of the day, it briefly dropped below $30,000. However, during the night it rebounded and now it is above $32,000 again. 

It is worth noting that yesterday the Nasdaq lost 4%, so MicroStrategy’s -25% seems definitely dictated by panic. 

Something similar also happened to Coinbase’s share price, which dropped 20% in one day.

General crypto market sentiment

Thus, it was not only the fear of a margin call that pushed MicroStrategy’s share price down, but probably also the panic related to the problems in the crypto markets contributed decisively. 

In particular, despite the fact that MicroStrategy has only invested in Bitcoin, yesterday the price of LUNA (Terra) more than halved in a single day, throwing the crypto markets into a panic. 

In fact, Terra is the second-largest DeFi ecosystem in the world after Ethereum, and a collapse of it could generate severe damage to the entire decentralized finance industry. 

To tell the truth, Bitcoin doesn’t have much to do with that sector, to the extent that during the night its price rebounded while that of LUNA continued to fall, but panic, as we know, is irrational. 

Currently, MicroStrategy’s share price is the lowest since 2020, which is below what it was when Bitcoin’s price was still well below $20,000. It is therefore a level that is difficult to justify other than the fear that things could get even worse. 

The general situation of crypto markets certainly doesn’t help though, as sentiment now seems to be heavily negative. It is close to historical lows, although the price of Bitcoin yesterday managed to stay just above the lows of last year. 

To this should be added the negative sentiment in the traditional financial markets in the US, and by summing up the two negatives it is easy to imagine that panic has set in. 

It is worth noting that Bitcoin’s subsequent rebound has already brought it back to recover all losses accumulated yesterday after the US stock exchanges opened in decline.