Bitcoin Just Got a Big New Buyer. Should You Follow Its Lead?

The price of Bitcoin (CRYPTO:BTC) is determined primarily by the law of supply and demand. Since cryptocurrency has a fixed supply, increased demand will lead to a higher price. And demand may increase due to a new large buyer.

Jack Dorsey, CEO of Fintech Block (NYSE: SQ), devoted his entire first quarter letter to shareholders talking about Bitcoin. Among his comments, he noted that Block will commit to using 10% of its gross profits 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, which would result in an $8 million investment in Bitcoin under the new plan. But that number is an increase: The first monthly purchase in April totaled $4.4 million.

Sure, it’s a big investment, but it won’t significantly move the $1 trillion Bitcoin market. But Dorsey is encouraging other businesses to follow his lead, including offering sellers on Square the ability to automatically invest up to 10% of their gross profits into Bitcoin. This 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 by “open-sourcing” Block’s investment plan. He calls it the Bitcoin Blueprint for Corporate Balance Sheets. The plan is not very complicated and individuals can easily copy it.

The essence of the plan is to systematically allocate 10% of Block’s gross profit from Bitcoin products each month to purchasing Bitcoin. This is a form of dollar-cost averaging that generally involves investing equal dollar amounts in a security over time. Consistent purchasing of an asset over time smooths out the average price paid per unit. When the price goes up you will buy fewer units, 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 associated with Bitcoin investing. “Bitcoin price can be highly volatile and difficult to predict as price movement is not always correlated with existing asset classes,” Dorsey wrote in a draft of his plan. “We believe this approach allows us to optimize our long-term investment position while minimizing price risks arising from attempting to accumulate less frequent and larger purchases.”

Since Block’s purchases will be relatively large, the company will trade during a specific two-hour window each month when liquidity is high. It uses a special type of order called time-weighted average price (TWAP), which is designed to have as small an impact on the market price as possible.

The story continues

However, since the price of Bitcoin is largely determined by supply and demand, the arrival of a large investor who plans to hold Bitcoin indefinitely will push the price of Bitcoin higher over time, all else being equal.

Anyone who wants to invest in Bitcoin can repeat this plan. Take 10% of your monthly savings (or whatever amount you are comfortable investing) and use it to buy Bitcoin. Over time you will accumulate a sizeable position.

Why now might 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 this could be a big catalyst for the price of the cryptocurrency.

As of the end of the first quarter, Bitcoin accounted for approximately 9% of the cash, cash equivalents and securities on Block’s balance sheet. This may not seem like much for the average crypto investor, but for a large investor it is quite a lot.

Good news: It is becoming easier and more acceptable for large institutional investors to buy Bitcoin. This is partly thanks to new spot Bitcoin ETFs that hold Bitcoin directly.

Cathie Wood’s ARK Invest estimates that if institutional investors allocate just 1% of their assets to Bitcoin, it could push the price to $120,000, and a total allocation of 4.8% could push the price to $550,000.

We are still in the very early stages of institutional investor adoption. As more businesses, investment managers, and individuals decide to purchase Bitcoin, this could have a profound impact on its price. Block makes it easier for individuals and small businesses to invest, but there’s still plenty of room for large institutions to grow their holdings.

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Adam Levy has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.

Bitcoin Has a Big New Buyer. Should You Follow His Lead? originally published by The Motley Fool