Strategy is continuing to load up on Bitcoin.
It’s able to do that because of a clever financing move that isn’t available to you.
The drivers for its decision to invest are still relevant to your investment decision.
Strategy (NASDAQ: MSTR) just bought more than $1.4 billion of Bitcoin on April 28 (CRYPTO: BTC), and it isn’t the first time. With such a purchase, the company is sending an unambiguous signal that it thinks the coin’s value is going to continue increasing.
But that doesn’t mean you should follow in Strategy’s footsteps blindly. Let’s evaluate its approach and its rationale so that you will know whether it makes sense to invest in Bitcoin too, or if it would be better to allocate your capital elsewhere.
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Strategy now holds about $52 billion of Bitcoin, which works out to roughly 2.6% of the entire supply. During the past six months or so, the business has been purchasing about 2,087 bitcoins daily, which is a vastly larger amount than the roughly 450 bitcoins that are freshly mined each day. Therefore, this purchasing activity is a relatively new and significant supply constraint that is helping to push the price of the coin higher.
Strategy has publicly said that it does not intend to sell any of its Bitcoin unless it is forced to. So, assuming it can keep buying the asset, it will be taking a larger and larger amount of supply off the market. The main pillar of its financing of these purchases is its issuance of convertible debt, which relies on the value of Bitcoin to be an appreciating asset that pumps up its stock price, thereby enabling it to issue even more convertible debt to raise more money to buy more of the coin.
Thus far, this plan has been working for Strategy. Its stock is up by 190% during the past 12 months, exceeding Bitcoin’s gain of 51% and the market’s gain of 8%. If Bitcoin’s price falls by a large amount, it is possible that the company’s creditors will demand that it liquidate its crypto investment so as to ensure that they get repaid. That could spike a downward spiral for both Strategy’s stock price and Bitcoin’s price too.
But as an investor thinking about whether to buy Bitcoin, the more important thing to recognize here is that your financial situation and purchasing capabilities are unlikely to be anything similar to Strategy’s. You shouldn’t copy its willingness to commit larger and larger sums of capital to buying more of the coin, and you definitely shouldn’t borrow to finance your purchases. Even if it’s among the safest cryptocurrencies, Bitcoin is still a volatile asset, and so it’s too risky for most individuals to buy it by using a lot of leverage from debt.
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