price of Bitcoin (Cryptocurrency: BTC) It is mainly determined by the law of supply and demand. Since the supply of cryptocurrencies is fixed, an increase in demand will lead to an increase in price. A new major buyer could also increase demand.
Jack Dorsey, FinTech CEO block (NYSE:SQ)spent its entire first quarter letter to shareholders talking about Bitcoin. In his comments, he said that Block is committed to using 10% of the gross profits it earns from various Bitcoin-related products to purchase Bitcoin as an investment each month.
Block's Bitcoin gross profit in the first quarter was $80 million, and the new plan will see $8 million invested in Bitcoin. However, this number is increasing. Initial monthly purchases in April totaled $4.4 million.
While this is certainly a huge investment, it is unlikely to significantly move the Bitcoin market, which has a market capitalization of $1 trillion. But Dorsey is encouraging other companies to follow his lead, 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.
Dorsey's blueprint is easy to understand
Mr. Dorsey encouraged other executives to invest heavily in Bitcoin by “open sourcing” Mr. Block's investment plan. He calls this the Bitcoin blueprint for corporate balance sheets. This plan is not very complicated and can be easily replicated by individuals.
The core of the plan is to systematically allocate 10% of the monthly gross profits from Block's Bitcoin products to Bitcoin purchases. This is a type of dollar-cost averaging, which typically involves investing the same amount of money in a security over a set period of time. Purchasing assets consistently over time smooths out the average price paid per unit. When the price increases, the number of items purchased decreases, and when the price decreases, the number of items purchased increases. This can be a great way to accumulate volatile assets like Bitcoin.
Dollar-cost averaging solves many of the challenges associated with Bitcoin investing. “Bitcoin's price is highly volatile and difficult to predict because its price movements do not necessarily 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 risk associated with attempting larger, less frequent purchases.”
Because Mr. Block's purchases are relatively large, the firm executes trades within a designated two-hour window each month when liquidity is high. We use a special order type called Time Weighted Average Price (TWAP), which is designed to have as little impact on market prices as possible.
However, since the price of Bitcoin is primarily determined by supply and demand, large investors who enter the market with plans to hold Bitcoin indefinitely will not be able to afford it over time, all else being equal. It will increase the price of Bitcoin.
Anyone who wants to invest in Bitcoin can reproduce this plan. Simply use 10% of your monthly savings (or whatever amount you're comfortable investing) to buy Bitcoin. Over time, you will accumulate significant positions.
Why now is the best time to invest
Dorsey's continued commitment to 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 that could be a big catalyst for crypto prices.
At the end of the first quarter, Bitcoin accounted for approximately 9% of cash, cash equivalents, and marketable securities on Block's balance sheet. While this may not sound like a lot to the average crypto investor, it is a significant amount to larger investors.
The good news: It has become easier and more accepted for large institutional investors to buy Bitcoin. This is also thanks to a new Spot Bitcoin ETF that directly holds Bitcoin.
Cathie Wood's ARK Invest claims that if an institutional investor allocated just 1% of their holdings to Bitcoin, the price would rise to $120,000, and with a total allocation of 4.8%, the price would rise to $550,000. I'm guessing.
We are still in the early stages of institutional adoption. As more companies, investment managers, and individuals decide to purchase Bitcoin, it can have a significant impact on its price. While the block makes it easier for individuals and small businesses to invest, there is still plenty of room for large institutions to increase their holdings.
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Adam Levy has a position in Bitcoin. The Motley Fool has a position in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.
Bitcoin has a new big buyer.Should we follow their lead? Originally published by The Motley Fool
