Bitcoin’s value hit an 18-month-low overnight as recent volatility in the cryptocurrency markets continued. The slump, which saw the token hit a value of $20,816, has business intelligence software firm MicroStrategy at risk of a margin call, where it will need to produce extra funds to cover its liabilities.
The company’s founder Michael Saylor placed a bet big on crypto in 2020, buying more than $3bn worth of the cryptocurrency at an average price of $30,000 per coin. But MicroStrategy isn’t the only company at risk, and continued pressure on Bitcoin’s value could trigger an industry-wide cascade of margin calls, experts warn.
While the currency was riding high MicroStrategy’s investment seemed like a sound one, but a series of issues facing the cryptocurrency sector, including the crash of stablecoin Terra USD and this week’s problems for Celsius, the world’s second-largest crypto exchange which has halted withdrawals, the price of Bitcoin is dropping quickly.
MicroStrategy president Phong Le previously warned that if Bitcoin drops below $21,000 it would trigger a margin call, although this is disputed by Saylor. He said the company has a $205m loan and needs to maintain $410m as collateral from its Bitcoin stash. Saylor told investors on the company's most recent earning that with 129,218 bitcoins, the value would have to drop to $3,562 for it to fall below the $410m collateral limit.
'Highly unusual' approach to Bitcoin
Jared Klee, an analyst specialising in cryptocurrencies at Futurum Research, said it won’t just be MicroStrategy in trouble if Bitcoin drops below $20,000 as it would likely trigger a cascade of margin calls and a dash to sell that would push the value even lower.
He told Tech Monitor that MicroStrategy’s approach to using Bitcoin as a value store is far from unique, but the scale at which it has done it is “highly unusual”, not least because the company's revenues have been declining for a number of years, with its software having been superseded by other packages on the market.
MicroStrategy says its business intelligence software is still used by some 4,000 customers across 26 countries but with many businesses choosing cloud-based intelligence platforms instead, its share price has been in decline for some time.
“The problem facing MicroStrategy is that they’ve been in decline for far longer than they’ve been investing in Bitcoin,” Klee says. “They were doing fine in the market they were in, but the market was going away and they failed to adapt properly.”
The MicroStrategy Bitcoin Investment is difficult to unpick, said Klee, as the company made multiple trades at different rates and at different times, so it is difficult to calculate the real loss, or real point a margin call would be triggered. He said “anything below $20,000 would be a serious problem”.
Cascade of margin calls
If MicroStrategy and other companies holding Bitcoin also look to sell to minimise losses, you could lead to a market with no debt, which for big institutional Bitcoin holders will trigger a contagion, with multiple margin calls, Klee argues.
He said the biggest outcome will likely be a renewed emphasis on the need for regulation, but doesn’t predict a “cleansing of the crypto sector” with multiple firms shutting down and only a handful remaining, as happened following the original internet bubble collapse.
“It is more like what happened after the collapse of the railways in the US," he explains. "Most of the cryptocurrency sector is built on open source software such as the blockchain which will still be there even if the companies operating on top of it go bust. So other firms will step up and take their place in the future, operating on that same technology.”
What does MicroStrategy's Bitcoin investment mean for customers?
Steven Dickens, tech analyst at Futurum Research predicts that Saylor would remain bullish in his Bitcoin investment, holding out for long-term gains regardless of any immediate drop in value.
“MicroStrategy was a sleepy software vendor that never garnered headlines before its corporate bet on Bitcoin," he says. "The company's price points are very transparent so if he can service his debt obligations in the short term, which MicroStrategy’s legacy software products will surely do, then Wall Street will be able to properly value the company’s Bitcoin bet beyond the immediate crash in Bitcoin’s price.”
Customers of MicroStrategy should pay close attention to the value of Bitcoin as they might be able to strike a bargain when licenses are up for renewal, argues Steve Jones, IT consultant at Capgemini.
"Companies that need cash often strike great multi-year deals," he wrote on Twitter.
If I had a bunch of Microstrategy licenses I might be inclined to watch the BTC price to understand how it could impact my renewal.— Steve Jones (he/him) (@mosesjones) June 14, 2022
Companies that need cash often strike great multi year deals if they need cash.