MicroStrategy Shares Drop as Bitcoin Margin Call Looms

MicroStrategy has come under pressure after a sharp decline in Bitcoin prices over the weekend. The company has vowed never to sell any of the approximately 130,000 Bitcoin it has in its possession, but with the cryptocurrency trading below $24,000, a margin call could force its hand. Bitcoin lender Celsius Network suspending withdrawals and transfers may have contributed to the sell-off.

Investors will be closely watching to see if MicroStrategy is forced to liquidate some of its bitcoin holdings. If so, it could put further downward pressure on prices. The company’s decision to buy bitcoin was widely seen as a vote of confidence in the digital currency, and its extensive holdings have made it one of the most influential players in the space.

The stock market is unpredictable, and volatile swings often mark Monday mornings. So it’s no surprise that MicroStrategy’s MSTR -27.36% shares took a nosedive in premarket trade. The company has been in the news lately for its aggressive accumulation of cryptocurrency, led by CEO Michael Saylor, an ardent crypto enthusiast.

MicroStrategy’s bet on Bitcoin BTCUSD, +0.60%, has paid off handsomely, but the volatile nature of digital assets means that the company is far from out of the woods. Saylor acknowledged as much when he said last week that “it’s possible we could lose all of our investment.”

But despite the risks, Saylor remains confident in cryptocurrency and believes it will play a significant role in MicroStrategy’s future success. In a recent interview, he said that he sees Bitcoin as “a reserve asset on par with gold.”

Saylor has been a big proponent of cryptocurrency, and his company’s actions show this. Not only has MicroStrategy used profits from its analytics software business to purchase bitcoin, but it has also borrowed via convertible bond issuance and loans to buy even more. This aggressive accumulation has led some to worry that the company is putting too many of its eggs in the crypto basket.

MicroStrategy isn’t the only firm feeling the heat from volatile cryptocurrency markets. Bitcoin mining companies have also been hit hard by declining prices. Some miners have even been forced to sell their equipment at a loss due to profitability concerns.

MicroStrategy’s Bitcoin holdings are not the only ones that have been subject to a margin call. During the first-quarter conference call, the company’s CFO, Phong Le, said that only the bitcoin purchased against its stockpile was subject to a margin call. According to a transcript compiled by FactSet Research, he said

Now, the risk is that we would have to contribute more Bitcoin.

CFO, Phong Le

This means that if the value of bitcoin falls below a certain level, the company would be required to add more bitcoin to its holdings to meet the loan requirements. Le’s comments suggest some level of risk associated with holding onto bitcoins purchased with leverage. If the value of the bitcoin falls and margins are called, the company could be forced to put up more bitcoin as collateral. This could lead to further losses if prices continue to decline.

While this may seem like a risky proposition, it is essential to remember that MicroStrategy has successfully used this strategy before. In fact, according to Le, the company has never had to contribute additional cryptocurrency when taking out these loans.

So while there is always some inherent risk involved in any investment, it seems clear that MicroStrategy knows what it is doing to leverage its bitcoin holdings.

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