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MicroStrategy extends week-long decline to 53% as bitcoin dips below its average price paid of $30,700

May 12, 2022, 02:04 IST
Business Insider
Michael Saylor, CEO of MicroStrategyJoe Raedle/Getty Images
  • MicroStrategy stock extended its week-long decline to 53% on Wednesday as bitcoin continued to fall.
  • Bitcoin dipped below $30,700, which is the average price MicroStrategy paid for its stash of 129,000 bitcoin.
  • MicroStrategy could get margin called and be forced to sell some of its bitcoin if the crypto drops to $21,000.

The decline in MicroStrategy stock continued on Wednesday after bitcoin briefly dipped below the company's average price paid for the cryptocurrency.

MicroStrategy fell 27% in Wednesday trades, and is down 53% over the past week as investors' shift to risk-off mode accelerates amid a continued rise in inflation and growing concerns that the broader economy may enter a recession.

MicroStrategy first began adding bitcoin to its balance sheet in 2020, and has amassed 129,218 bitcoin at an average price paid of about $30,700. That didn't sit well with investors when bitcoin fell below $30,000 on Wednesday, hitting a low of $29,314.

And the outlook doesn't look great after the collapse of Terra and poor earnings from Coinbase.

The bet made by MicroStrategy is even more tenuous when you consider that the fledging software company raised billions of dollars in debt to fuel its spree of bitcoin purchases.


That puts the company at risk of default if the cryptocurrency continues its plunge, especially given that MicroStrategy's software business is not profitable enough to service the debt. That risk is showing through in the current pricing of some of MicroStrategy's individual bonds, with its convertible offering due in 2027 trading at 60 cents on the dollar earlier this week.

If bitcoin falls below $21,000, MicroStrategy will be met with a margin call from one of its loans. That would force the company to either put up more collateral to the loan or sell some of its bitcoin holdings, according to comments from MicroStrategy CFO Phone Le on the company's most recent earnings call.

MicroStrategy was asked during the call, "how far does bitcoin have to fall for MicroStrategy to receive a margin call on the Silvergate loan?" In March, MicroStrategy took out a $205 million bitcoin-collateralized loan with Silvergate Bank to purchase more bitcoin.

"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," Le answered. Bitcoin would need to fall 32% from current levels to hit $21,000.

Earlier this year, CEO Michael Saylor said he doesn't plan to ever sell MicroStrategy's bitcoin stash. But he may not have a choice if bitcoin continues to slide lower.

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