Can Bitcoin Hold $20,000 Level?

Several weeks ago a number of market observers pointed out that a few hedge funds, and corporate CEO’s, were using Bitcoin as their preferred cash equivalent, rather than Treasury Bills and Money Market Funds. In fact, it was reported that Michael Saylor the CEO of MicroStrategy (MSTR) had a Billion Dollar position in Bitcoin, which was financed partially with loans.

Using borrowed money to build a position in a stock, or any other asset, is called Leverage. In the case of stocks it is called using Margin. The Federal Reserve sets the level of Margin that can be used in stock trading, and it is currently at 50%. That is to buy $100 of stock one only needs to have $50 in cash.

Leverage, or Margin investing magnifies gains, when things go as predicted; however, it can create significant problems for both the borrower, and the lender, if the asset starts to decline in price.

As we pointed out a few weeks ago, the followers of MSTR indicated that if Bitcoin closed below $20,000 it might cause a major margin call. That is the borrower needs to put up more cash, or the lender can sell the asset, at market prices. If you remember, about two weeks ago, Bitcoin did drop significantly below $20,000 after most major markets had closed for the weekend. Getting as low as $17,800.

However, before the markets opened the following Monday, some big buyers placed orders to drive Bitcoin’s price well above the $20,000 level. As was suggested at that time, it would take a few weeks to determine if that was a real long term buying program or a coordinated rescue operation.

So, we are once again facing a slowly sinking Bitcoin price. Some pros are saying that this is merely a retest of the recent low. Other analysts are saying that based on previous sell offs of Bitcoin, lower prices could still be ahead.

If Bitcoin does break $20,000 it could set off a series of margin calls, so we could see extreme levels of volatility, in the weeks ahead. This might be a good time to be on the sidelines.

As we quoted Warren Buffett before: “Only when the tide goes out, do we learn who is swimming naked.”