Bitcoin sell-off puts MicroStrategy (MSTR) in danger of bankruptcy. Here’s why

YEREVAN (CoinChapter.com) – Bitcoin (BTC) price stood at just over $28,000 in Thursday’s New York session, after crashing over 25% month-to-date. Furthermore, the flagship crypto took the crypto market down for the ride, negatively affecting tech stocks. For example, companies associated with cryptocurrencies, such as business intelligence firm MicroStrategy (MSTR), took a hit and saw their stock prices plummet alongside Bitcoin.

MSTR and BTC; is the correlation dangerous for investors?

In detail, MicroStrategy chose to make Bitcoin a part of its core business strategy in Aug. 2020. The company continuously acquired hefty batches of BTC, bringing its total Bitcoin reserve to $5.8 billion as of May 12, 2022. Moreover, the firm has been raising debt and equity increasingly, with the sole purpose of boosting its BTC holding.

Hence, MicroStrategy’s stock has traded in unison with BTC since 2021.

However, the correlation underscored MSTR’s vulnerability to Bitcoin price swings. The company’s large BTC stash has made MSTR a quintessential Bitcoin-linked stock. In April 2022, the company’s CEO, Michael Saylor, described the MicroStrategy as a quasi-BTC exchange-traded fund (ETF).

Thus, MicroStrategy could fail to abort the downfall and even face bankruptcy, should the flagship crypto tank any further.

Also read: MicroStrategy buys Bitcoin worth $190 million to push total BTC holdings above $4B — MSTR consolidates.

Additionally, the analytical team at StocksTelegraph asserted that Bitcoin’s bearish trajectory could prove disastrous for MSTR, especially if the coin price falls beneath $21,000, which would trigger a margin call. The latter is a demand for an investor to deposit further funds to cover possible losses.

MicroStrategy could face a margin call if BTC falls to $21K.

Notably, the company’s business strategy entails two core dimensions: expansion of its analytical software clientele and acquiring and holding Bitcoin. From a business strategy standpoint, Bitcoin reserves offer significant potential to the company. The crypto could be an effective hedge against inflation and an optimal protocol for the company in reaching out to its software market.

However, the BTC volatility is spelling a potential financial disaster for the prospects and sustainability of MSTR. Phong Le, the company’s Chief Financial Officer, revealed his position on a possible margin call in the Q1 2022 earnings call.

Also read: MicroStrategy will offer its employees an option to invest in Bitcoin (BTC) for their 401K savings plan.

The executive asserted that a margin call would be initiated once Bitcoin touches the $21,000 mark, reflecting a 50% margin. After that, the company would be “compelled” to pay up its long-term debt obligation.

Meanwhile, the mentioned debt stands at roughly $2.4 billion, a substantial amount compared to MicroStrategy’s $500 million revenue. However, Saylor proposed to use the company’s uncollateralized BTC holdings to avoid the margin call. These unencumbered coins add up to 95,643 BTC out of the company’s total holdings of 129,218 Bitcoin.

Experts suggest that reducing MicroStrategy’s Bitcoin holding to such a substantial degree in case of significant downward volatility could prove “highly unsustainable” for MSTR’s long-term strategy, which is based on BTC’s long-term bullish assumption.

Also read: Coinbase (COIN) dumps to record low alongside Bitcoin while experts give a BUY verdict.

MSTR could tank even if Bitcoin recovers

 As mentioned, the company’s deteriorating software segment performance added to the MSTR’s unsustainability. The latest Q1 2022 earnings report revealed troubling figures, as the revenue declined 3% YoY to $119 million and came in at 6% below estimates. Product Support revenue of $67 million also edged down from $70.5 million in Q1 2021.

We saw some revenue headwinds in Q1. This included a more challenging macroeconomic environment due to war in Ukraine, a tough comparison in Q1 2021, where we saw license revenue grow 69% and total revenue grow 10% year-over-year, and ongoing cloud growth, which has a short-term negative impact on product license and total revenue.

clarified Phong Le.

Also read: Is Marathon Digital, a Bitcoin mining stock, a better buy than MicroStrategy? Let’s see.

Moreover, the company’s revenues have been on a steady decline over the years. This indicates that the company’s software segment is on an unsustainable trajectory. As a result, MicroStrategy might have to address the issue strategically before the stock’s business activities can sustain the Bitcoin holding incentive.