Yesterday, MicroStrategy filed a document with the SEC warning that it has invested another $6 million in Bitcoin.
MicroStrategy continues with its investments in Bitcoin
MicroStrategy has purchased an additional 301 bitcoins for ~$6.0 million at an average price of ~$19,851 per #bitcoin. As of 9/19/22 @MicroStrategy holds ~130,000 bitcoins acquired for ~$3.98 billion at an average price of ~$30,639 per bitcoin.https://t.co/5kYW98ij4I
— Michael Saylor⚡️ (@saylor) September 20, 2022
The document states that in the period between 2 August and 19 September 2022, the company acquired about 301 BTC with a spending of about $6.0 million in cash, at an average price of about $19,851.
This last figure is interesting because it means that the purchases were made mainly when the price of Bitcoin was below $20,000.
It has now been since mid-June, which is more than three months, that the price has been hovering around this threshold, and MicroStrategy took advantage of this to make new purchases particularly at those times when the price was below this threshold.
This time the company used “excess cash” to purchase BTC.
It is worth noting that MicroStrategy now no longer keeps excess cash in the form of dollars, or other fiat currencies, but precisely in Bitcoin. So it is rather a given that when it has any, it decides to convert it into BTC, especially at those times when the purchase price of BTC is low.
Overall it now holds about 130,000 BTC, acquired at a total cost of about $3.98 billion, or an average purchase price of about $30,639.
At current levels, this is overall a rather high average purchase price, considering that the company began acquiring BTC in August 2020 at a price of about $12,000.
There is logic in this strategy as well
When MicroStrategy decided to no longer hold its cash reserves in dollars, replacing the fiat currency with Bitcoin, it in fact also inevitably decided to convert any new money that came into reserves into BTC.
The company evidently produces profits that are set aside as reserves, and according to their current strategy that began two years ago, as soon as it sets them aside they convert them into Bitcoin. In other words, when they decide to set aside cash reserves, the first thing they do is use that cash to buy BTC, and then they set aside as reserves precisely the BTC purchased in this way.
With such a strategy over the course of two-plus years, they have used about $3.98 billion to accrue about 130,000 BTC, with a total current value of about $2.46 billion.
Thus for now it is a strategy that has produced a loss of $1.51 billion, or 38% of the invested capital.
MicroStrategy for now has never made any big sales of the purchased BTC, partly because it just does not seem to need them as it continues to grow its provisions. Probably the hope is that in the future the market value of Bitcoin may rise again, and thus in the long run this strategy may turn profitable.
For example, if the market price was what it was at the beginning of May, MicroStrategy would be in profit by $1.21 billion, or 31% of the invested capital.
In the short-term, the price of Bitcoin is volatile, but it is even more so in the long-term, so it could absolutely be the case sooner or later that the company’s strategy will turn a profit, just as it is possible that it could also eventually make a loss, and so on.
The mistake that is often made when trying to interpret MicroStrategy’s purchases is to think that it is speculation.
Speculators buy only to sell in the shortest possible time and at the highest possible gain. MicroStrategy, on the other hand, accumulates reserves by converting the dollars it manages to set aside into Bitcoin.
It is by no means certain that such a strategy is better or worse than a purely speculative one, but theoretically in the long run it should be better than the alternative of accumulating dollars.
Although Bitcoin reserves are much riskier, especially if BTC is bought during bullruns, dollar reserves have the certain characteristic of producing losses.
The difference lies precisely in the fact that Bitcoin reserves can produce both losses and gains, with high risk, while dollar reserves in the long run are sure to produce losses, albeit small and with a low level of risk.
Abandoning the dollar
MicroStrategy has decided to abandon dollar reserves completely by taking a large risk in keeping only BTC, but a middle ground is also possible that allows one to risk a small portion of one’s reserves by investing in Bitcoin while keeping the bulk of the reserves in fiat. In this way the risk is very small, but it is at least possible to hope to offset the inevitable losses in fiat reserves with any gains in Bitcoin.
Many of those who set aside BTC as reserves do so by using the so-called Dollar Cost Averaging (DCA) technique, which is a technique of buying BTC at regular intervals, investing roughly the same amount in fiat each time, so as to buy at both high and low prices. Since in the long run the price of Bitcoin in dollars tends to rise above the historical average, it is hoped that in this way the purchase price will eventually be lower than the possible sale price.
In theory, although it is rather difficult, better results could be achieved by avoiding buying when the price is high during big bullruns, and concentrating purchases in bear markets. After all, until now the price of Bitcoin has always followed the four-year halving cycle, hence with a big bullrun year followed by a bear market year, a rebound year, and a lateralization year.
MicroStrategy has opted for an almost classical DCA, in the sense that although it does not make regular purchases with the same figures all the time, it converts the dollars it accumulates into BTC whenever it has them available, without worrying too much about individual purchase prices. In this way, in the end the approximately 130,000 BTC purchased were taken in the aggregate at an average price of just over $30,000, which is higher than the current price but probably in line with the average bear market price.
However, should the current difficult phase in the crypto markets continue, in the coming months the company will have a way to continue to buy at a lower price, and in the event that sooner or later the bear market ends giving way to a rebound year, that strategy that now clearly appears to be at a loss could suddenly turn into a gaining strategy.
The fact that during last year’s obvious bullrun they continued to buy even at very high prices, despite having started buying at $12,000, means either that they believed there would not be a heavy bear market as there is now, or that they chose to continue with DCA regardless of market prices. It could also mean both things, namely that they expect in the long run a rebound and a new growth phase, but at the same time that they do not intend to stop DCAing under any circumstances.