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Bitcoin just got a new big buyer. Should you follow his example?
The price of Bitcoin (CRYPTO: BTC) is primarily determined by law of supply and demand. Since there is a fixed supply of cryptocurrency, increasing demand will lead to a higher price. And demand could increase due to a new large buyer.
Jack Dorsey, fintech CEO To block (NYSE: SQ), dedicated its entire first quarter letter to shareholders to talk about Bitcoin. Among his comments, he noted that Block will commit to using 10% of its gross profits from its various Bitcoin-related products to purchase Bitcoin as an investment each month.
For the first quarter, Block’s gross profit in Bitcoin was $80 million, which would result in an investment of $8 million in Bitcoin under the new plan. This figure, however, is on the rise: His first monthly purchase in April totaled $4.4 million.
It’s a big investment, sure, but it won’t significantly move the market for Bitcoin, which has a market capitalization of $1 trillion. However, Dorsey is encouraging other companies to follow his lead by offering sellers on Square the ability to automatically invest up to 10% of their gross profits in Bitcoin as well. And that could push demand significantly higher.
Image source: Getty Images.
Dorsey’s blueprint is easy to follow
Dorsey encouraged other entrepreneurs to invest heavily in Bitcoin through Block’s “open sourcing” investment plan. He calls it the Bitcoin Blueprint for corporate financial statements. 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 each month to purchasing Bitcoin. This is a form of dollar-cost averaging, which generally involves investing equal dollar amounts in a security over time. Constantly purchasing a good over time levels 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 with investing in Bitcoin. “The price of bitcoin can be highly volatile and difficult to predict as its price action is not always correlated with existing asset classes,” Dorsey wrote in his draft plan. “We believe this approach allows us to optimize our long-term investment position by minimizing the price risks associated with attempting to aggregate less frequent and larger purchases.”
Because Block’s purchases will be relatively large, the company will execute trades within a specific two-hour window each month when liquidity is high. It uses a special order type, called time-weighted average price (TWAP), designed to have as little impact on the market price as possible.
The story continues
However, since the price of Bitcoin is largely determined by supply and demand, a large investor entering the market with the intention of holding Bitcoin indefinitely will, over time, increase the price of Bitcoin, given the same all other conditions.
Anyone can replicate this plan if they want to invest in Bitcoin. Simply take 10% of your monthly savings (or whatever amount you want to invest) and use it to buy Bitcoin. Over time, you will accumulate a sizable position.
Because now could be a great time to invest
Dorsey’s commitment to continually invest in Bitcoin and keep it on Block’s balance sheet could be a sign of greater adoption of the asset by institutional investors. And it could be a huge catalyst for the cryptocurrency price.
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 a lot to the average cryptocurrency investor, but to a large investor it is quite a lot.
The good news: It’s becoming easier and more acceptable for large institutional investors to buy Bitcoin. This is due in part to new Bitcoin spot ETFs, which hold Bitcoin directly.
Cathie Wood’s ARK Invest estimates that if institutional investors allocated just 1% of their holdings to Bitcoin, the price could rise to $120,000, while 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’s still plenty of room for large institutions to increase their holdings.
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Adam Levy has positions in Bitcoin. The Motley Fool has positions and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.
Bitcoin just got a new big buyer. Should you follow his example? was originally published by The Motley Fool