Futures markets signaled a potential new leg lower for Wall Street on Monday morning, as investors continued to grapple with all the uncertainties about inflation, interest rates, geopolitics, and other macroeconomic factors. The Nasdaq Composite (^IXIC -2.05%) saw its futures contracts fall nearly 3% in premarket trading as of 8:15 a.m. ET, and if the index were to open lower by the same amount, it would represent a return to levels not seen in more than a year and a half.
As bad as the losses in the stock market appeared to be, they paled in comparison to declines in cryptocurrency prices over the weekend. With key digital assets like Bitcoin (BTC 1.87%) and Ether (ETH 0.32%) down 20% to 30% from where they were just last Friday, crypto investors are bracing for another round of the extreme volatility that these markets have seen throughout their histories. Yet those losses are also bleeding into the stock market, where MicroStrategy (MSTR -2.82%) and Coinbase Global (COIN -3.24%) are poised to open sharply lower as well.
Will MicroStrategy face a Bitcoin margin call?
Shares of MicroStrategy were lower by 25% on Monday morning. The technology company's fundamental business has little to do with blockchain investments, but MicroStrategy has been vocal about its bullish views on Bitcoin and has put its money where its mouth is, taking on leverage to amass a substantial position in the cryptocurrency on its balance sheet.
MicroStrategy reported holding more than 129,200 Bitcoin tokens as of March 2022. At that time, with Bitcoin trading above $45,000, the company's crypto holdings added up to nearly $5.9 billion. In just the first three months of 2022, MicroStrategy had added more than 4,800 Bitcoin to its balance sheet, spending $215 million. Much of that funding might have come from its first-ever Bitcoin-backed term loan, which generated $205 million in proceeds.
Yet the way that term loan was structured shows some of the risk MicroStrategy has assumed. As lender, Silvergate Bank (SI) set terms that required MicroStrategy to put up four times the Bitcoin value in collateral. Moreover, a top-up provision requires additional collateral if the outstanding loan balance rises to 50% of the collateral value.
On May 3, CFO Phong Le said that if Bitcoin's value fell to around $21,000, there was the potential for a margin call on MicroStrategy's outstanding loans. Yet Le also said the company could put up additional collateral, so that might forestall any forced liquidation. Nevertheless, there might be a price at which MicroStrategy could no longer come up with additional assets to pledge -- and a liquidation of a position the size of MicroStrategy's stake could have a dramatic impact on the crypto markets.
Coinbase falls as peer halts withdrawals
Elsewhere, shares of Coinbase Global traded lower by another 17% on Monday morning in premarket trading. The move lower for the cryptocurrency exchange came amid troubling news from a smaller industry peer.
The Celsius Network chose to pause all withdrawals, including swaps and transfers between accounts. Citing extreme market conditions, Celsius said the move would put it "in a better position to honor, over time, its withdrawal obligations." The company called the move a necessary action, with the goal of ensuring continued liquidity and operations in its effort to preserve and protect assets. Celsius Network isn't publicly traded, but its Celsius Network Token (CEL) saw its value plunge by nearly 60% before recovering somewhat to a 45% loss.
Coinbase is much larger than Celsius Network and has the financial resources to withstand more extreme market fluctuations. However, the news highlighted the harsh conditions in the digital asset market. Moreover, with cryptocurrency values falling, interest in trading could diminish as well, hurting Coinbase's core business model.
Cryptocurrency investors have been prepared for massive declines, because history has shown that Bitcoin and other digital assets have fallen by 80% or more numerous times. However, with these assets becoming more mainstream, crypto has had more of an impact on stock markets as well, and that could continue for some time.
