Crypto sell-off being driven by ‘an awful lot of confusion, misinformation’: Analyst

BTIG Managing Director and Financials Analyst Mark Palmer joins Yahoo Finance Live to discuss the crypto sell-off, bitcoin dropping below $22,000, the Coinbase employee layoff, and the outlook for cryptocurrency markets.

Video Transcript

BRIAN SOZZI: Crypto is still getting pummeled with Bitcoin prices briefly falling below the $21,000 mark. The crypto plunge is sounding the alarm for platforms like MicroStrategy and Coinbase. You see Bitcoin prices there, now down about 5%. Joining us now to discuss is BTIG Managing Director and Financials Analyst Mark Palmer. Mark, always great to get some time with you.

Is it as simple enough to say that what we're seeing, this round crypto, is being caused by Fed policy changes, which may come tomorrow and which may come in the future? And do you think we're nearing some short-term bottom here?

MARK PALMER: Thank you for having me on. A lot of what's going on with crypto right now is simply a correlation with risk assets in general. And of course, risk assets are reacting to the anticipated Fed moves. With that said, there have been some idiosyncratic factors that are causing crypto to decline even more. A couple of these-- we had Terra, which is the blockchain that issues the UST stablecoin, or did, which imploded a couple of weeks ago. That definitely impacted sentiment. And more recently, just on Sunday night, we saw Celsius, which is one of the biggest crypto lenders, pause withdrawals on its platform, which also did not do great things from a sentiment perspective.

With that said, we are looking at the prices of some of these crypto stocks. You mentioned MicroStrategy on the show, Coinbase, and others, that just are not in line with the prospects and potential of these names. And frankly, there's been an awful lot of confusion, misinformation that's been bandied about around both the mainstream and social media that's contributing to that.

- Well, so there's two different ways to think about this space too. There's one where we think about the highly speculative assets that are out there, but there's another where you think about the number of people who have invested in something that has a stable blockchain or a consensus model like an Ethereum where they've seen all these commercials going forward and saying, hey, there's going to be a new reality.

And since that point, yeah, we've seen a major selloff, but is there still a way forward that you see for some of the other cryptocurrencies that are built on a reliable model at least?

MARK PALMER: Oh, absolutely. And I think that's a very important point, because the Web3 ecosystem is not just speculative cryptocurrencies. It is a vast array of projects that are being built on blockchain that are bringing a level of transparency and efficiency that we simply don't see in the traditional world. What we are seeing is that the innovation that is going on in the space has not stopped.

We just had the Consensus Conference in Texas, which was packed with Web3 projects that are focused on coming up with alternative solutions to everyday problems. Those projects are still getting funded by venture capital even amidst an absolutely horrific market environment. So I think that's a really important point that the world of Web3 is not just Bitcoin. It's not just speculative cryptocurrencies. It's an entire movement built around establishing a new direction built around blockchain.

JULIE HYMAN: In many cases, it's a less well-funded movement at this point, though, just by virtue of the fact that we've seen cryptocurrencies come down so much. But I want to talk about one of the other misapprehensions that you alluded to and that you also wrote about in a note, and that has to do with MicroStrategy and its $21,000 Bitcoin margin call that so many have seized on in this market. They've been selling the shares.

You talked about, not just in a note this morning but in a note last month as well, that this has not been well understood by the market. What happens to MicroStrategy if and when Bitcoin hits $21,000?

MARK PALMER: Well, of course, we dipped below the $21,000 mark last evening. The answer to the question is not much of consequence. There is one term loan, a Bitcoin-backed term loan that MicroStrategy originated back in late March which has a provision such that if the price of Bitcoin drops such that the loan-to-collateral value of holdings backing that loan drops below a certain level, then MicroStrategy would have to contribute additional collateral in the form of Bitcoin to shore that up and to bring the loan-to-collateral ratio back in line with the provision.

Now, to put this into perspective, again, this is a $205 million loan. MicroStrategy has $2.4 billion in debt. This is the only instrument in its capital structure that is any sort of trigger, and it's a small portion of its overall debt. Second of all, with regard to maturities, this is the first of its debt that is going to be scheduled to mature, which would occur in March of 2025.

So again, to put this in perspective, this is $410 million of collateral that MicroStrategy needs to maintain against a $205 million loan. But at the same time, it has over 95,000 unencumbered Bitcoin that it can contribute to bring that loan-to-collateral ratio back in line. What's also important to note is that they won't have to sell any Bitcoin to do this. And if the price of Bitcoin rallies, they can take the additional collateral they contributed right back out from the custodian that's supporting that loan. So you put all of that together, and this whole situation seems very much blown out of proportion.

- Just lastly, while we have you here, you've already talked about whether or not the bottom has been set in, and that still remains to be seen at this point in time. But if there were a move lower, do you think it would be prompted-- should it be prompted by covering on that margin? And then additionally, what would that bottom look like from here? What's the next point that investors should be paying close attention to?

MARK PALMER: Well, I think, again, with regard to MicroStrategy, there's just a question of where does the price of Bitcoin move and how much collateral would they have to post in the near term, keeping in mind they would be able to bring that collateral right back out if the price of Bitcoin rallies. With regard to the broad market, again, this is very much about risk assets in general.

And we believe that some of the stories that have come out, be it Terra or Celsius, are going to be viewed as isolated incidents. This is not the entire Web3 space, as we talked about. And once we begin to have a more rational approach with regard to valuation and that some of the fervor associated with the Fed moves begins to calm down, that will create a baseline off of which crypto and the entire space will be able to bounce.