Should We Be Concern of BTC Margin Calls?
When it comes to leverage investing it has always been a warning to such kind of investing due to bear markets or price drops in investments. Since BTC price has been struggling as of lately and has dropped close to 40% from its all time highs it is concerning.
In addition to price drop as a concern some investors are leverage in BTC investing and need BTC to be at a certain price or they will be "Forced" to sell their BTC investment. This type of situation is called a margin call. Where investor is using its invested asset as collateral to borrow more and invest the borrowed asset.
$21,000
News came out today that Microstrategy disclosed that the company would encounter a margin call if BTC falls below $21,000. The chances of that happening is still unknown but it is worth mentioning when margin calls are seen the drop in asset price can fall steeper. This is because in margin calls investors need to sell to cover their loans.
Microstrategy has around 129,000 BTC which equates to a meager 0.06% of the total BTC in circulation but if it is immediately liquidated it will definitely pressure BTC price.
Of course in all likelihood Microstrategy would not want to hold onto BTC far too long if prices continue to drop and would do partial liquidation of BTC holdings to reduce their borrowing costs. This will still put pressure on BTC prices but at least it will be somewhat controlled.
Conclusions
The recent cryptocurrency markets dipping and dipping rapidly has in part due to the leverage investing. If in fact BTC would fall to as low as $21k it will cascade throughout all coins/token prices. This is a big if. Yet we need to be educated that even if prices have fallen that the potential of continuation of price falling can happen and one reason is due to margin calls. The next time you feel like a certain investment can fall any further revise that thought to think and find for yourself at what prices are their whales of the investment that likely will need to sell.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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If they have to buy back that's trouble. Similar to the GameStop stocks. Losing billions overnight !
Yep will have to remember that $21k and see if there is support if it ever falls that low.
I am worried about it if it did drop that far. Considering how much BTC is not even on the exchange, the liquidity provided by Microstrategy would cause havoc on the market. There would be a lot of FUD and people would be scared out of their positions.
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I have decided to accept the draw downs considering what happened in 2018. I ran away back then but looking back now know that was a mistake. Btc fell all the way down $4500 so 80% drawdown. Still got an all time high in a few years.