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A Bitcoin margin call. If the world’s leading cryptocurrency drops below $21,000, Michael Saylor’s MicroStrategy will be forced to pay up

May 4, 2022, 9:12 PM UTC

The business intelligence firm and quasi-Bitcoin ETF MicroStrategy saw its stock crater by as much as 27% on Monday as the crypto winter continued to take effect over the weekend.

Cryptocurrencies saw their total market cap sink over $200 billion since last week with the world’s leading digital asset, Bitcoin, dropping below $24,000 for the first time since December 2020. The downturn came after the crypto lending platform Celsius announced on Sunday that it is pausing withdrawals, swaps, and transfers on its platform due to “extreme market conditions.”

With prices for the world’s leading digital assets plummeting, the crypto faithful are at risk, especially MicroStrategy and its CEO Michael Saylor. 

If Bitcoin drops below $21,000, Saylor and company will be hit with a margin call, forcing them to pony up more of the leading cryptocurrency to maintain their loan even as the asset’s price tumbles.

A Bitcoin evangelist

Saylor is perhaps one of the most fervent supporters of Bitcoin on the planet—and that’s saying something, given the almost cultlike community behind the world’s leading cryptocurrency.

The MIT graduate has become a hero to the Bitcoin faithful ever since his company began stockpiling the cryptocurrency in August 2020.

Saylor has gone so far as to call Bitcoin “freedom,” and “the most universally desirable property in space and time.” And at Bitcoin 2022 Miami—the largest Bitcoin event worldwide—he was met by thousands of cheering fans as he instructed the crowd to never sell their crypto.

Saylor’s Bitcoin appetite has grown so much that the CEO is now borrowing millions from banks to add more of the cryptocurrency to MicroStrategy’s balance sheet. The collateral? That’s right, more Bitcoin.

MicroStrategy added another $215 million worth of Bitcoin at an average purchase price of $44,645 per coin in the first quarter, SEC filings show, bringing its total holdings to 129,218 Bitcoins acquired for $3.97 billion, or $30,700 per coin.

At Bitcoin’s $23,554 price as of 10 p.m. ET on Monday, the company’s holdings were worth just over $3 billion. Its market cap, on the other hand, is roughly $1.77 billion.

MicroStrategy has said it has no plans to sell its Bitcoin, and until recently, its buy-and-hold strategy had been profitable, but with Bitcoin’s price down roughly 50% in the past six months, the times are changing. 

As a result of its status as a quasi-Bitcoin ETF, and a pile of over $2.3 billion in long-term debt, MicroStrategy’s stock is down roughly 85% from its February 2021 all-time high closing price of over $1,000 per share.

And if Bitcoin’s value continues to fall, Saylor and company could face one hell of a margin call.

The margin call from hell

MicroStrategy’s CFO Phong Le explained in the company’s first-quarter earnings call on May 3 that if Bitcoin’s price falls below $21,000, or around 50% from current levels, it will be forced to pony up more cryptocurrency to back its $205 million Bitcoin-collateralized loan with Silvergate Bank that was used to buy Bitcoin in the first place.

“We took out the loan at a 25% LTV; the margin call occurs at 50% LTV,” Le said. “So essentially, Bitcoin needs to cut in half, or around $21,000, before we’d have a margin call.”

The CFO noted that MicroStrategy still holds “quite a bit” of uncollateralized Bitcoin that it could use to answer any potential margin call, however.

“As you can see, we mentioned previously we have quite a bit of uncollateralized Bitcoin,” Le said. “So we have more that we could contribute in the case that we have a lot of downward volatility. But again, we’re talking about $21,000 before we get to a point where there needs to be more margin or more collateral contributors. So I think we’re in a pretty comfortable place where we are right now.”

Still, taking out a loan collateralized by Bitcoin to buy more Bitcoin is a risky game. If the world’s leading cryptocurrency falls and a margin call goes through, MicroStrategy would be put in a tough spot.

MicroStrategy did not respond to Fortune’s request for comment.

June 13, 2022: This story has been updated with the news that Celsius has announced it will pause withdrawals, and the general drop in the crypto markets.

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