Bitcoin, and cryptocurrencies more generally, were in all kinds of trouble at the beginning of what promised to be a very challenging week for market sentiment.
With short-end US Treasury yields surging above 3% and expectations building for even more aggressive rate hikes from the Fed, speculative assets are in extreme peril. Very much contrary to the claims made by proponents on its behalf, crypto is a speculative asset.
Of course, describing it that way assumes it’s an asset at all. A better way to conceptualize of the situation might be to think of Bitcoin as high-beta gold (if you can get past the inherent contradiction), Ethereum as an emerging market currency (where Web3 is a developing country), decentralized finance tokens as equity in Ponzi schemes, stablecoins as debt instruments of varying creditworthiness and all other coins as poker chips.
On Monday, Bitcoin fell near $23,000, taking its drawdown to ~66% from record highs above $67,000 (figure below).
Needless to say, that had knock-on effects for the rest of the cryptosphere.
It also raised the specter of a MicroStrategy margin call. For those unaware, MicroStrategy is the (very proud) owner of the world’s largest corporate Bitcoin stash — more than 129,000 tokens, acquired for a total cost of $3.97 billion or, roughly $30,700 per Bitcoin after fees.
As of March 31, nearly 19,500 of MicroStrategy’s Bitcoin was collateral for a $205 million loan from Silvergate. That loan wasn’t necessary for cash flow purposes. Rather, as CFO Phong Le explained on the company’s Q1 call last month, MicroStrategy “took out the loan primarily so that we could continue to invest more in Bitcoin and also to create a market for a Bitcoin-backed term loan.”
So, MicroStrategy took out a loan partly backed by its Bitcoin in order to buy more Bitcoin and also to open the door for more such loans by pioneering a market.
During the same remarks, Phong provided details on how far Bitcoin would need to fall for MicroStrategy to receive a margin call. “We took out the loan at a 25% LTV, the margin call occurs at 50% LTV,” Phong said, recapping the terms disclosed in a March 23 filing. “So essentially, Bitcoin needs to [fall to] $21,000 before we’d have a margin call,” he added, noting that “we could contribute more Bitcoin to the collateral package” if necessary.
Last year, while editorializing around one of the convertibles, I gently suggested that in my opinion, the bonds-for-Bitcoin idea wasn’t necessarily a good one.
Bottom line: MicroStrategy issued bonds and used the proceeds to buy Bitcoin, and it also took out a loan against some of the Bitcoin it bought. I’ll be generous and call that an unconventional strategy. CEO Michael Saylor has deliberately, loudly and proudly tied MicroStrategy’s fate to Bitcoin. And Bitcoin is now falling. That could be problematic. For MicroStrategy, yes, but also for Bitcoin. If you get the feeling this is self-referential, you’re not wrong. And that, in itself, is a problem.
Some market participants are — justifiably or not — terrified of the prospective margin call mentioned above. Bitcoin wasn’t far from $21,000 (figure below).
I imagine MicroStrategy would try to avoid having to sell any of its Bitcoin holdings, especially considering Saylor’s fervent belief that Bitcoin is the only real money on Earth.
But it’s not just MicroStrategy worries. Celsius suspended withdrawals, swaps and transfers citing “extreme market conditions,” a decision that contributed to the rapid deterioration in sentiment. Then, Binance, the world’s largest crypto exchange, paused Bitcoin withdrawals citing a “stuck” transaction. They were resumed three hours later, much to the market’s relief.
The Financial Times captured it well. “The market infrastructure that underpins the digital asset market showed worsening signs of strain,” an article published Monday said.
Celsius recently found itself under a microscope as regulators scrutinized interest-bearing crypto accounts which some critics argue should be considered unregistered securities offerings. Celsius’s coin, CEL, was down 50% in 24 hours.
This comes just weeks after the collapse of TerraUSD, a widely used algorithmic stablecoin, and its floating balancer token, LUNA. The drama in the Terra ecosystem was a body blow to the nascent world of decentralized finance, where total value locked (a key metric) sat at just over $80 billion Monday, down from a peak of nearly $250 billion in December. Celsius had $24 billion in deposits late last year. It had $12 billion midway through last month.
All of the above speaks to the dynamics I’ve warned on repeatedly since ending a short-lived experiment in Web3 in March. Bitcoin is, in many respects, above the proverbial fray, but it’d be a mistake to suggest it’s somehow immune. It’s subject to its own self-referential dynamics and accelerant events.
As for Ethereum, it’s the de facto reserve currency for decentralized finance and a barometer of Web3 more generally. If it collapses, so does the Web3 dream. It dropped near $1,100 coming off the weekend, down 30% in 72 hours.
As shares of MicroStrategy tumbled Monday, Saylor was characteristically defiant. The tweet shown below is indicative of his famous conviction.
— Michael Saylor?? (@saylor) June 13, 2022