Bitcoin
Bitcoin just got a big new buyer. Should you follow their example?
This billionaire’s Bitcoin investment plan follows a solid, fundamental approach to purchasing volatile assets.
The price of Bitcoin (Bitcoin 2.76%) is mainly determined by law of supply and demand. Since there is a fixed supply of the cryptocurrency, increasing demand will lead to a higher price. And demand may be increasing due to a large new buyer.
Jack Dorsey, the fintech CEO Block (SQUARE -1.85%), dedicated his entire Q1 letter to shareholders to talk about Bitcoin. Among his comments, he noted that Block will commit to using 10% of its gross profit from its various Bitcoin-related products to purchase Bitcoin as an investment every month.
In the first quarter, Block’s gross Bitcoin profit was $80 million, which would result in an $8 million investment in Bitcoin under the new plan. That number is an increase: the first monthly purchase in April totaled $4.4 million.
It’s a big investment, for sure, but it won’t significantly move the Bitcoin market, which has a value of US$1 trillion. market value. However, Dorsey is encouraging other companies to follow his example, including offering Square sellers the ability to automatically invest up to 10% of their gross profits in Bitcoin as well. And that could significantly increase demand.
Image source: Getty Images.
Dorsey’s plan is easy to follow
Dorsey encouraged other business owners to invest heavily in Bitcoin through Block’s “open source” investment plan. He calls it the Bitcoin Blueprint for Corporate Balance Sheets. The plan is not very complicated and individuals can easily replicate it.
The core of the plan is to systematically dedicate 10% of Block’s gross profit from its Bitcoin products every month to purchasing Bitcoin. This is a way of dollar cost average, which generally involves investing equal dollar amounts in a security over time. Consistently purchasing an asset over time smoothes the average price paid per unit. When the price goes up, you will buy fewer units, and when the price goes down, you will buy more. This can be a great way to accumulate a volatile asset like Bitcoin.
Dollar-cost averaging solves many challenges involved in investing in Bitcoin. “Bitcoin’s price can be highly volatile and difficult to predict, as its price action does not always correlate with existing asset classes,” Dorsey wrote in his blueprint. “We believe this approach allows us to optimize our long-term investment position while minimizing the price risks associated with trying to aggregate larger, less frequent purchases.”
Because Block’s purchases will be relatively large, the company will execute trades within a specific two-hour window every month when liquidity is high. It uses a special order type – called time-weighted average price (TWAP) – designed to have the smallest possible impact on the market price.
However, since the price of Bitcoin is largely determined by supply and demand, a large investor who enters the market with plans to hold Bitcoin indefinitely will, over time, drive up the price of Bitcoin if all rest is the same.
Anyone can replicate this plan if they want to invest in Bitcoin. Simply take 10% of your monthly savings (or whatever amount you feel comfortable investing) and use it to buy Bitcoin. Over time, you will accumulate a considerable position.
Why Now Could Be a Great Time to Invest
Dorsey’s commitment to continually investing in Bitcoin and keeping it on Block’s balance sheet could be a sign of greater adoption of the asset by institutional investors. And this could be a huge catalyst for the price of cryptocurrency.
At the end of the first quarter, Bitcoin represented approximately 9% of Block’s cash, cash equivalents and marketable securities on its balance sheet. This may not seem like much to the average crypto investor, but to a large investor it is quite a lot.
The good news: it is becoming easier and more acceptable for large institutional investors to buy Bitcoin. This is partly due to the new spot Bitcoin ETFswho directly hold Bitcoin.
Cathie Wood’s ARK Invest estimates that if institutional investors allocated just 1% of their holdings to Bitcoin, it could push the price to $120,000, and an aggregate allocation of 4.8% would push the price to $550,000.
We are still in the early stages of adoption by institutional investors. As more companies, investment managers and individuals decide to buy Bitcoin, this could have a profound impact on its price. Block is making it easier for individuals and small businesses to invest, but there is still plenty of room for large institutions to increase their holdings.