In the last 24 hours, Bitcoin has fallen 15% to $24,200. This is great news for Ryan Ballentine (35), a short-seller at the Maryland investment company Bireme Capital. His $60 million small fund bet against MicroStrategy stock, a publicly traded business research software company that has nearly 130,000 bitcoin. It is worth approximately $3 billion today.
Many investors have turned to Tysons, Virginia-based Microstrategy as a leveraged proxy for Bitcoin, since there is no SEC-approved exchange-traded Bitcoin fund. Its stock rose from $145 in August 2020, to more than $1,000 at its peak of February 2021. It trades today at $146 per share. This is 73% lower than the S&P 500’s decline of 43% and 21% respectively.
Halfway through the meteoric rise, the stock was trading around $700. Bireme Capital noticed something was wrong and placed a bet against the company crypto enthusiasts were falling in love. Short selling was a risky strategy that involves borrowing stock to sell it at a high profit in the hope that it will be available for purchase at a lower price. Bireme finally has its moment in the sun after Microstrategy shares plummeted.
Ballentine, CEO of Bireme Capital and co-founder, says that “I believe there’s many people who think MicroStrategy also is a zero.” Before they bought bitcoin, it had an enterprise value of approximately $700 million. They now have a loss of a billion dollars on bitcoin. We believe the numbers are zero even at current Bitcoin prices.
Bireme, a small investment management company for high-net worth individuals, was founded in 2016. The firm began to bearishly view tech stocks in the summer and autumn of 2020, adding shorts such as “crypto-hype Stock” Overstock.com, and finally so-called meme stocks like AMC, which “have a meme-premium built into, that we were happy taking the other side of,” according to Ballentine. Ballentine says that it is easy to see the absurdity of many of these short positions by running the numbers.
Bireme has devoted $37 million, or 62% of its capital, to what it calls “fundamental value strategies”, which seeks out investor biases in order to identify misvalued opportunities for U.S. equity equities. Bireme initially targeted Microstrategy, committing $400,000 to the shorting of the firm at a nominal rate of less that 1% from Interactive Brokers. Ballentine sees the low interest rate as a sign that not many, if any, were doing so at the time.
A month later, the firm doubled the size of its short position. Ballentine believes that the increase in short-sellers of Microstrategy stocks has been evidenced by the fact that the interest rate to borrow them had peaked at 14%. It is becoming increasingly difficult to find Microstrategy stocks to shorten.
According to Bloomberg, the short interest in Microstrategy now amounts to roughly 3.5million shares or 35% of the total floating, up from 1.7 million at its beginning. According to a CoinGape report, Jim Chanos, a legendary short-seller, said that Microstrategy’s “core business isn’t worth much” earlier this month. Ballentine, whose company has so far earned $420,000 in unrealized profits, says that “we had a large profit on our short situation.” He said, “We actually added the short position.” “We believe it’s zero.”
Evan Tindell (37), Bireme cofounder and chief investment officer, says that “we saw the potential for such a downward spiral.” It happens whenever you borrow money to purchase volatile assets. The pricing is at your mercy and margin calls could lead to further downside.
According to Microstrategy’s first quarter earnings report, the average price for its 129,218 Bitcoin was $30,700. His firm also reported that it had purchased an additional $205million worth of Bitcoin via a loan from Silvergate Bank. This loan used 19,466 bitcoin as collateral. The price dropped below the average in May for the first time since two years.
Despite panicked reports warning of Microstrategy’s imminent collapse, Saylor and SEC filings confirm that the loan, officially known as Microstrategy subsidiary Macrostrategy is still in compliance with its covenants, so long that bitcoin prices don’t drop below $21,000 MicroStrategy was close to taking action when Bitcoin’s recent plunge to $23,200 put it at risk of being forced to add more bitcoin to its loan reserves. According to SEC filings the loan-to-value ratio for Silvergate’s $205 million loan must not exceed 50%. Saylor states, “We will generally test every single day at the end-of-the-day to see if we have a collateral calling.” “And then, we’ll keep ahead of that.”
Ballentine says, “I believe Michael Saylor completely when he stated that he believes in the long-term prospects for Bitcoin.” To fully secure the subsidiary, they will need to deposit additional Bitcoins or dollars.
Ballentine says, “We are agnostic about the long-term worth and utility of bitcoin because at end of the day Bitcoin could still be extremely useful and MicroStrategy may still go bankrupt.” “Like these two things aren’t mutually exclusive it doesn’t say anything about how valuable the technology is or where we’re going, in terms the utility of Bitcoin in the global marketplace.”