Ask the Experts.....
- This article MicroStrategy can ignore Bitcoin bear market price crash to $20K — Research answers many questions poised by the title question, which I am sure many cryptocurrency afficianados and detracts alike have been thinking about.
Part 1
What is Microstrategies Strategy??
- Basically Microstraegies has bought most of it's Bitcoin with borrowed funds, loans in dollars it borrowed against the price of it's stock.
- Microstrategies borrows dollars from loans on it's stock.
- Microstrategies takes those loan proceeds, dollars, and buys Bitcoin.
- The value of the Bitcoin is reflected on Microstrategies balance sheet of assets and liabilities, and it is net positiive.
- So far as the price of Bitcoin has risen, so has the value of this asset on Microstrategies balance sheet, and so has the price of Microstrategies stock.
- Then Microstrategies borrows more against the now increased price of it's stock, and buys more Bitcoin.
- Microstrategies then waits for the price of bitcoin to rise, and then waits for the price of it's stock to rise, then borrows more dollars against the stock and uses it to but Bitcoin.
Part 2
The logic of the purchases is seemingly flawless.
- Microstrategy borrows against todays value of it's stock in dollars, to buy Bitcoin.
- Todays dollars are reduced in value by inflation, and todays Bitcoin is increased in value by inflation.
- Thus they borrow a depreciating asset, dollars, and use it to buy an appreciating asset, Bitcoin. This makes perfect sense.
- And the leverage or risk of the loans is decreased by the Seemingly ever increasing price of Bitcoin.
- Because as the price of Bitcoin rises, the ratio between the value of the borrowed funds and the value of the purchased asset grows, reducing the risk or leverage they use for the loans.
For example, if they borrowed a million dollars against 2 milllion dollars in stock, the ratio is 1 dollar borrow loan to 2 dollars stock asset value. That's a 50% loan to asset ratio.
But they also bought 1 dollar worth of Bitcoin. So the million dollar loan is actually secured by 2 million dollars in stock and 1 million dollars in Bitcoin. That's a 1:3 ratio or 33%.
Now if the stock value increases to 3 million, and the Bitcoin value increases to 1.5 million, the same million dollar loan is now secured by 4.5 million dollars in asset value; stock and Bitcoin. That's 1:4.5 or less then 25% a loan to asset value.
So as the price of Microstrategy stock and the price of Bitcoin rise, the risk to the bank which loaed Microstrategy the loans decreases overtime.
source:me
- All is well as long as Bitcoin increases in price after ever loan to buy more Bitcoin.
Part 3
The concern: what happens if the price of Bitcoin falls a lot?
- This question is in the minds of people like me who have seen a couple Bitcoin bear markets, and seen Bitcoin lose 70-80 percent of it's value.
- In the last bear market the high was 60,000 and the low was 16,000. So 16000/60000 is 27%, so Bitcoin lost 73%% of it's value from the all time high to the low of the last Bull market.
- And historically Bitcoin does something similar to this ever bull bear cycle.
- So if the price of Bitcoin falls will the price of Microstrategy stock fall?
- And when would the value of Bitcoin and the stocks be less then the value of the loans?
- We know that if the collateralization is 1:3 between the value of the loans and the value of the stock plus Bitcoin, the combined value of stock and Bitcoin would have to fall 67% for the loans to collateralized by a value of stock and Bitcoin less then the value of the loans.
- So far experts are pegging this at 19,000 dollars for Bitcoin. And we know that at the current price of 100,000, a 81% drop in value of the combined value of Microstrategy Stock and Bitcoin would have to occur.
But since I know 90 percent is possible, then 81% is possible. It's just a matter of how probable is it. - Some would say this is a theoretical exercise... but anyone older then 6 years old lived through the last 90& price drop, and people older then 16 lived through a 70% price drop... so depending on your age, you have seen this bull-bear market price action before, so you are wondering, if the bull bear cycle we have witnessed repeatedly over the last 12 years...will continue.
- I heard during the last bull market that this time was different, and no bear market was coming. but if history is to be believed, it is not a matter of if it will occur, only when it will occur and how far the price will drop.
- Indeed, this time could be different...
Or not......
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@shortsegments
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In the last bear market the bottom was around 16000, NOT 3000. The 3000 bottom was in 2018, after a top at 20000
Thanks.
I listened to an Italian YouTuber who was talking about this and explained that if Bitcoin were to fall to $30,000, Microstrategy would have a lot of problems. In my opinion, Bitcoin will not fall to $30,000 anymore. I think we will see it fall in the next few days, but below $45,000 it will be difficult to go
I agree and feel there are good reasons to feel Bitcoin price wont drop as low as previous bear markets due to demand.
#hive #posh
Errata
In the first version of this post I stated that the low of the last bull was 3000, and that was wrong. The low was 16000. So I have corrected the article.
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