Rocking the Boat at MicroStrategy
If Bitcoin (BTC) drops to $21,000 hold tight for a tsunami of forced selling that will cause BTC to crash.
There is a high likelihood of that happening as the bitcoin proxy traded on the NYSE software company MicroStrategy told us about this stunning news during their earnings call.
MicroStrategy CFO Phong Le admitted the company will be forced to pony up more Bitcoin to back its loan with Silvergate Bank.
CEO Michael Saylor looked like a genius when BTC was roaring, but not so much now as investors head for cover as indiscriminate selling takes hold of all risk assets.
Shares of MSTR are down around 75% in the past 6 months.
Ironically, the company shares are underperforming BTC but that is the least of the company’s concerns as they head for uncharted territory and could be forced to tap the debt market at a time when borrowing costs have shot through the roof.
Part of the quagmire here is that the CFO has been financing these Bitcoin purchases with borrowed money and the CFO will need to calculate how much more debt they can handle while accommodating the interest payments for the debt already borrowed.
It's easy to see this going from bad to worse as high-interest debt on top of crushing debt is a recipe for disaster and lenders would have sniffed this out.
I mention this $205 million loan from Silvergate Bank to buy more Bitcoin because the loan was and still is INTEREST ONLY.
Saylor has greenlighted this highly risky strategy and if MSTR continues down this terrible vein of form, they might not have the money to pay back the principal at the end of the loan.
Le claimed that the company holds “quite a bit” of uncollateralized Bitcoin that it can use to support its loan should the need arise. He also noted that Bitcoin is highly unlikely to touch $21,000, a level that was last seen in late 2020.
In the first quarter of the year, Microstrategy purchased $215 million worth of Bitcoin at an average purchase price of $44,645 per coin, bringing its total holdings to 129,218 Bitcoins acquired at an average price of $30,700 per coin, or for $3.97 billion, according to SEC filings. At current rates, the company’s Bitcoin stash is worth over $4.2 billion.
Le likes to say we are nowhere near $21,000 but it's slowly muddling itself down as the macro conditions are the worst in a generation forcing investors to ditch speculative assets like Bitcoin.
Unfortunately, many of these events came too early for BTC and BTC needed time to develop.
Our unfavorable backdrop includes items such as 2 unforced policy errors by the US Central Bank, military conflict, hyperinflation, spiking energy costs, and supply chain problems.
None have been solved and any or all could get many times worse.
The big winner here has obviously been the US dollar, short Bond traders, and energy stocks.
At the end of the day, BTC only goes up when fiat is poured into its asset, and the challenges we face now make BTC not as attractive as it was when the Central Bank printed $10 trillion and a good chunk of that went into Bitcoin.
That’s why we saw Bitcoin at $65,000 in November 2021.
The intense tightening of liquidity we are experiencing now means those spigots have run dry and BTC is the main loser.
BTC is down to $31,000 and the drop from $10,000 was rapid, if that happens again, BTC will be at $21,000.
MSTR could be forced to dump their BTC which would take the digital gold to $15,000.
