Why MicroStrategy Stock Crashed Today | The Motley Fool


What happened

Shares of MicroStrategy (MSTR -25.55%) plummeted more than 25% on Monday as the price of Bitcoin (BTC -8.49%) plunged. 

So what 

Bitcoin’s price sank by over 9% on Monday to roughly $31,000. The popular cryptocurrency has lost more than half its value since reaching its highs near $69,000 in November.

With its limited supply of coins, some investors view Bitcoin as a hedge against inflation. But the Federal Reserve’s recent moves to raise interest rates to tame inflation appear to have reduced Bitcoin’s attractiveness.

Trading in the cryptocurrency has recently correlated more with assets such as technology stocks. As investors have sold off premium-priced growth stocks to reduce risk in recent months, they’ve also sold Bitcoin and other cryptoassets.

A person looking at a stock chart on a desktop computer.

Image source: Getty Images.

The sell-off in the crypto market has weighed heavily on MicroStrategy’s shares. The business intelligence company has become a de facto proxy for the price of Bitcoin after it purchased more than 129,000 coins. But at approximately $4 billion, MicroStrategy’s Bitcoin holdings are now worth more than the total market value of its stock. MicroStrategy ended the trading day on Monday with a market capitalization of roughly $2.5 billion. 

Now what 

That discrepancy could be related to the potential existential risks MicroStrategy faces due to its aggressive wager on Bitcoin. Not content to simply buy Bitcoin with its cash reserves and free cash flow, CEO Michael Saylor took the additional step of borrowing money to buy more of the volatile cryptocurrency.

The company can now face a margin call if the price of Bitcoin falls below $21,000. Essentially, this means MicroStrategy could be forced to sell its crypto holdings at depressed prices or put up more valuable collateral for its loan. Either outcome would likely disappoint investors — and result in more losses for shareholders.

Read More: Why MicroStrategy Stock Crashed Today | The Motley Fool

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