Money that is borrowed to buy stocks is sometimes an indicator of future market performance. Here is how it works and why the matter is relevant now.
2 min
Margin debt is a sometimes-overlooked but key part of the stock market that is particularly pertinent right now.
It is the money that investors borrow from stockbrokers to buy securities when they can’t or don’t want to fund the entire purchase with cash. Say an investor wants to purchase 100 shares at $50 each for a total of $5,000 but has only $2,500 to invest. That individual could buy the rest of the shares on margin. The same process can be used to buy exchange-traded funds.
Investors frequently use margin to get more bang for their investing buck. “The pro of margin is that it increases your purchasing power,” says Jeff Deiss, director of wealth planning at ACM in Ridgewood, N.J.
The downside is that brokers typically charge interest on borrowed money. And if the individual starts losing money on the investment, the stockbroker might ask for additional cash as security or collateral. That decision and how much cash will be required will depend on a variety of factors, including the remaining value of the investment, how much money the investor owes the broker and the requirements of the broker.
“Buying on margin comes with a lot of risk, and if you are going to use margin, it is probably a good idea to have some cash on the side,” says Mr. Deiss. Investors who don’t have the required additional cash may be forced to close out their positions at a loss.
A large amount of buying on margin also can be detrimental to the stock market as a whole.
At the end of January, customer margin debt at U.S. brokers regulated by the Financial Industry Regulatory Authority, or Finra, jumped to $799 billion from $562 billion a year earlier, according to data provided by Finra.
Some analysts say that jump in margin debt came from individual investors, who turned to online trading amid pandemic-related lockdowns. A combination of new easy-to-use trading technology, ultralow borrowing costs and stimulus checks from the federal government helped fuel the phenomenon.
“For younger folks, it’s kind of the drug of choice,” Mr. Deiss says.
The problem is, when there is a lot of margin debt concentrated in a few stocks, those stocks tend to see wild price swings, says Fabiana Fedeli, global head of fundamental equities at Rotterdam-based asset-management company Robeco. Anecdotal evidence indicates that the recent increase in margin debt coincided with higher participation levels by individual investors, she says.
Indeed, certain stocks that became popular with individual investors also saw price volatility earlier this year. “The minute that the margin couldn’t be met, some of the positions had to be sold immediately,” Ms. Fedeli says. “It gives volatility to the market,” she says.
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Selloff in bitcoin and other digital tokens hits crypto-treasury companies.
3 min
The hottest crypto trade has turned cold. Some investors are saying “told you so,” while others are doubling down.
It was the move to make for much of the year: Sell shares or borrow money, then plough the cash into bitcoin, ether and other cryptocurrencies. Investors bid up shares of these “crypto-treasury” companies, seeing them as a way to turbocharge wagers on the volatile crypto market.
Michael Saylor pioneered the move in 2020 when he transformed a tiny software company, then called MicroStrategy , into a bitcoin whale now known as Strategy. But with bitcoin and ether prices now tumbling, so are shares in Strategy and its copycats. Strategy was worth around $128 billion at its peak in July; it is now worth about $70 billion.
The selloff is hitting big-name investors, including Peter Thiel, the famed venture capitalist who has backed multiple crypto-treasury companies, as well as individuals who followed evangelists into these stocks.
Saylor, for his part, has remained characteristically bullish, taking to social media to declare that bitcoin is on sale. Sceptics have been anticipating the pullback, given that crypto treasuries often trade at a premium to the underlying value of the tokens they hold.
“The whole concept makes no sense to me. You are just paying $2 for a one-dollar bill,” said Brent Donnelly, president of Spectra Markets. “Eventually those premiums will compress.”
When they first appeared, crypto-treasury companies also gave institutional investors who previously couldn’t easily access crypto a way to invest. Crypto exchange-traded funds that became available over the past two years now offer the same solution.
BitMine Immersion Technologies , a big ether-treasury company backed by Thiel and run by veteran Wall Street strategist Tom Lee , is down more than 30% over the past month.
ETHZilla , which transformed itself from a biotech company to an ether treasury and counts Thiel as an investor, is down 23% in a month.
Crypto prices rallied for much of the year, driven by the crypto-friendly Trump administration. The frenzy around crypto treasuries further boosted token prices. But the bullish run abruptly ended on Oct. 10, when President Trump’s surprise tariff announcement against China triggered a selloff.
A record-long government shutdown and uncertainty surrounding Federal Reserve monetary policy also have weighed on prices.
Bitcoin prices have fallen 15% in the past month. Strategy is off 26% over that same period, while Matthew Tuttle’s related ETF—MSTU—which aims for a return that is twice that of Strategy, has fallen 50%.
“Digital asset treasury companies are basically leveraged crypto assets, so when crypto falls, they will fall more,” Tuttle said. “Bitcoin has shown that it’s not going anywhere and that you get rewarded for buying the dips.”
At least one big-name investor is adjusting his portfolio after the tumble of these shares. Jim Chanos , who closed his hedge funds in 2023 but still trades his own money and advises clients, had been shorting Strategy and buying bitcoin, arguing that it made little sense for investors to pay up for Saylor’s company when they can buy bitcoin on their own. On Friday, he told clients it was time to unwind that trade.
Crypto-treasury stocks remain overpriced, he said in an interview on Sunday, partly because their shares retain a higher value than the crypto these companies hold, but the levels are no longer exorbitant. “The thesis has largely played out,” he wrote to clients.
Many of the companies that raised cash to buy cryptocurrencies are unlikely to face short-term crises as long as their crypto holdings retain value. Some have raised so much money that they are still sitting on a lot of cash they can use to buy crypto at lower prices or even acquire rivals.
But companies facing losses will find it challenging to sell new shares to buy more cryptocurrencies, analysts say, potentially putting pressure on crypto prices while raising questions about the business models of these companies.
“A lot of them are stuck,” said Matt Cole, the chief executive officer of Strive, a bitcoin-treasury company. Strive raised money earlier this year to buy bitcoin at an average price more than 10% above its current level.
Strive’s shares have tumbled 28% in the past month. He said Strive is well-positioned to “ride out the volatility” because it recently raised money with preferred shares instead of debt.
Cole Grinde, a 29-year-old investor in Seattle, purchased about $100,000 worth of BitMine at about $45 a share when it started stockpiling ether earlier this year. He has lost about $10,000 on the investment so far.
Nonetheless, Grinde, a beverage-industry salesman, says he’s increasing his stake. He sells BitMine options to help offset losses. He attributes his conviction in the company to the growing popularity of the Ethereum blockchain—the network that issues the ether token—and Lee’s influence.
“I think his network and his pizzazz have helped the stock skyrocket since he took over,” he said of Lee, who spent 15 years at JPMorgan Chase, is a managing partner at Fundstrat Global Advisors and a frequent business-television commentator.
