This billionaire’s Bitcoin investment plan follows a solid fundamental approach to buying volatile assets.
The price of Bitcoin (BTC 0.28%) is primarily determined by the law of supply and demand. Since there’s a fixed supply of the cryptocurrency, growing demand will lead to a higher price. And demand could be increasing due to a big new buyer.
Jack Dorsey, the CEO of fintech Block (SQ -2.58%), devoted his entire first-quarter letter to shareholders to talk about Bitcoin. Among his comments, he noted Block will commit to using 10% of its gross profits from its various Bitcoin-related products to buy Bitcoin as an investment every month.
For the first quarter, Block’s Bitcoin gross profit was $80 million, which would result in an investment of $8 million in Bitcoin under the new plan. That number is an increase, though: It’s first monthly purchase in April totaled $4.4 million.
That’s a big investment, to be sure, but it won’t significantly move the market on Bitcoin, which has a $1 trillion market cap. However, 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 in Bitcoin as well. And that could push demand significantly higher.
Dorsey’s blueprint 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 isn’t very complicated, and individuals can easily replicate it.
The core of the plan is to systematically devote 10% of Block’s gross profit from its Bitcoin products every month to purchasing Bitcoin. This is a form of dollar-cost averaging, which generally involves investing equal dollar amounts in a security over time. Consistently buying an asset over time smooths out the average price paid per unit. When the price goes up, you’ll buy fewer units, and when the price goes down, you’ll buy more. That can be a great way to accumulate a volatile asset like Bitcoin.
Dollar-cost averaging solves a lot of challenges involved with Bitcoin investing. “The price of bitcoin can be highly volatile and hard to predict as its price action doesn’t always correlate with existing asset classes,” Dorsey wrote in his plan’s blueprint. “We believe this approach enables us to optimize our long-term investment position while minimizing the price risks associated with attempting to aggregate less frequent, larger purchases.”
Since Block’s purchases will be relatively large, the company will execute trades within a specified two-hour window each month when liquidity is high. It uses a special order type — called a time-weighted average price (TWAP) — designed to have as small an impact on the market price as possible.
However, since Bitcoin’s price is largely determined by supply and demand, a big investor coming into the market with plans to hold Bitcoin indefinitely will, over time, move the price of Bitcoin higher, all else being equal.
Anyone can replicate this plan if they want to invest in Bitcoin. Simply take 10% of your monthly savings (or whatever amount you’re comfortable investing) and use it to buy Bitcoin. Over time, you’ll accumulate a sizable position.
Why now could be a great time to invest
Dorsey’s commitment to continually invest in Bitcoin and hold it on Block’s balance sheet could be a sign of greater adoption of the asset by institutional investors. And that could be a massive catalyst for the cryptocurrency’s price.
As of the end of the first quarter, Bitcoin accounted for approximately 9% of Block’s cash, cash equivalents, and marketable securities on its balance sheet. That might not sound like very much for the average crypto investor, but for a big investor, it’s quite a bit.
The good news: It’s getting easier and more acceptable for big institutional investors to buy Bitcoin. That’s thanks in part to the new spot Bitcoin ETFs, which hold Bitcoin directly.
Cathie Wood’s ARK Invest estimates that if institutional investors allocated just 1% of their holdings to Bitcoin, it could drive the price to $120,000, and an aggregate allocation of 4.8% would push the price to $550,000.
We’re still in the very early innings of institutional investor adoption. As more businesses, investment managers, and individuals decide to buy Bitcoin, it could have a profound impact on its price. Block is making it easier for individuals and small businesses to invest, but there’s still a lot of room for large institutions to increase their holdings.
