Myth of Money: The Margin Call from Hell
Welcome to this week’s edition of Myth of Money, a weekly newsletter on the digital asset markets read by 12,000+ investors.
Disclaimer: The following is not intended as investment advice. Do your own research.
Today has been a painful morning for crypto traders and investors. As Bitcoin and Ethereum face a weekly drawdown of 20% and 30% respectively, investors are contemplating that we may be nowhere near the bottom.
One of the biggest stories on the street today is lending platform Celcius, which suspended withdrawals just a few hours ago due to a shortage of actual assets available on hand to meet their obligations.
And then Nexo stepped in with a flex.
I’m not sure if this offer is genuine or if Nexo just wants all of us to know that they are still doing well.
The market is grim today across the board. Rumblings continue that Michael Saylor, and his company Microstrategy, currently holding almost 130,000 BTC, is dangerously close to getting liquidated. Various liquidation targets are being thrown around from $21,000 down to $9,500.
According to Fortune Magazine - "A Bitcoin margin call. If the world’s leading cryptocurrency drops below $21,000, Michael Saylor’s MicroStrategy will be forced to pay up”
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.
To put Microstrategy’s conundrum in perspective, we can look at Coinbase and Robinhood, both overly exposed to digital and tradeFi market volatility.
No one truly knows. With another FOMC meeting coming up on Wednesday, we may see a relief rally mid-week across stock and crypto. But the downward trend still remains.
If you risk-managed well and are currently sitting on cash, I would make a strategy to average into the bottom, which may take another 6 months. If you do not have cash reserves, but hold quality assets such as Bitcoin, I would not short or panic sell. We could be closer to the bottom than you think. If you do not hold quality assets (that’s on you), see what you can exchange for higher-grade assets to wait out the storm.
Avoid Defi Ponzi-scheme-like contraptions at all costs, especially in this market when liquidity can dry up in an instant.
This Week By the Numbers 📈
Top Stories 🗞️
Yuga Labs, the creator of two of the most popular ape-themed non-fungible token (NFT) offerings — Bored Ape Yacht Club (BAYC) and OtherSide — witnessed yet another orchestrated phishing attack, with investors losing over 145 Ether (ETH) or nearly $260,000 at the time of writing. OKHotshot, a blockchain detective and a member of the Crypto Twitter community, alerted crypto investors about the compromise of two official Discord groups linked to BAYC and OtherSide NFTs. According to OKHotshot’s investigations, the attack was conducted by hacking into the Discord account of Boris Vagner, community and social manager at Yuga Labs. After gaining unrestricted access to the employee’s account, scammers shared various phishing links from Vagner’s Discord account into the official BAYC, Mutant Ape Yacht Club and Otherside groups.
The Bank of Uganda is open to the idea of cryptocurrency businesses participating in its Regulatory Sandbox, inviting members of the Blockchain Association of Uganda (BAU) to share their knowledge with the central bank. A letter from the bank dated June 1 to the chairperson of the BAU, Kwame Rungunda, referred to a meeting between the two parties in early May. The central bank also advised the country’s crypto advocacy group to brush up on the sandbox regulationsbefore it made time for further technical discussions.
The United States Court of Appeals for the Second Circuit on Thursday rejected Terraform Labs CEO Do Kwon’s dispute of a subpoena by the Securities and Exchange Commission (SEC). The federal agency was seeking documents and testimony in connection with its investigation of whether Terra used the Mirror Protocol to sell unregistered securities. Kwon was served with the subpoena in September 2021 while he was attending a conference in New York City. Kwon claimed in an October filing that the SEC had violated its own rules, the Administrative Procedure Act and other regulations by serving the subpoena in person. He later also disputed the court’s jurisdiction over the case due to Terraform’s lack of contact with the United States that court rejected those claims in February. The appeals court ruled that the subpoena was properly served and that the SEC could serve Terraform as a corporate entity through Kwon. Furthermore, the appeals court found that the district court did have jurisdiction over Terraform Labs and Kwon.
International payment processing giant Mastercard is expanding its payment network for non-fungible token (NFT) markets and Web3. The financial service provider announced that it has been working on expanding their payment networks to NFTs over the past year. The firm has partnered with a number of leading NFT marketplaces to allow 2.9 billion cardholders to directly make NFT purchases without buying crypto first. Currently, users need to buy crypto to bid on and buy NFTs. However, with the latest Mastercard partnership, billions of cardholders can now bypass the process of buying a transferring crypto to NFT marketplaces.
The United States Securities and Exchange Commission is investigating whether Binance Holdings broke securities rules when it launched its BNB token in an initial coin offering (ICO) five years ago, Bloomberg reported on Monday. The BNB ICO took place in July 2017 on several platforms during the height of the so-called ICO boom, and the Binance exchange opened just days afterward. According to Bloomberg, citing unnamed people familiar with the matter, at least one U.S. resident claimed to have taken part in the ICO, which could be a crucial fact for a SEC case, if the agency chose to pursue one. The SEC has claimed most cryptocurrencies are securities and brought cases against a number of ICO projects.
Thank you for reading this week’s edition of the Myth of Money.🚀
Until next week,
By Tatiana Koffman
Hi there and thanks for reading. If you stumble upon my newsletter, you will notice that I write about money, economics and technology. I hold a JD/MBA and spent my career in Capital Markets working across Mergers & Acquisitions, Derivatives, Venture Capital and Cryptocurrencies. I believe in empowerment through closing the financial education gap and creating equality of opportunity for the next generation. I have invested in 20+ companies and funds. Check out my portfolio here.
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