MicroStrategy invests another $6 million in Bitcoin

Yesterday, Micro strategy filed a document with the SEC warning that it has invested an additional $6 million in Bitcoin.

MicroStrategy continues its investments in Bitcoin

MicroStrategy has purchased an additional 301 bitcoins for ~$6.0 million at an average price of ~$19,851 per #bitcoin. From 19.09.22 @Microstrategy has ~130,000 bitcoins bought for ~$3.98 billion at an average price of ~$30,639 per bitcoin.

— Michael Saylor⚡️ (@saylor) 20 September 2022

The document says that in the period between August 2 and September 19, 2022, the company bought about 301 BTC with a consumption of about $6.0 million in cash, at an average price of about $19,851.

This last number is interesting because it means that the purchases were mainly made 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 hovered around this threshold, and MicroStrategy took advantage of this to make new purchases, especially at those times when the price was below this threshold.

This time the company used “excess cash” to buy BTC.

It is worth noting that MicroStrategy now no longer holds excess cash in the form of dollars, or other fiat currencies, but precisely in Bitcoin. So it’s pretty much a given that when it has some, it decides to convert it to BTC, especially at those times when the purchase price of BTC is low.

In total, it now has about 130,000 BTC, bought 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 fairly high average purchase amount, considering that the company started buying BTC in August 2020 at a price of around $12,000.

There is logic in this strategy as well

Indeed, when MicroStrategy decided to no longer hold its cash reserves in dollars, replacing the fiat currency with Bitcoin, it also inevitably decided to convert new money coming into reserves into BTC.

Apparently, the company produces profits that are set aside as reserves, and according to their current strategy that started 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 the very BTC purchased in this way.

With such a strategy in two plus years, they have spent about $3.98 billion to accumulate about 130,000 BTC, with a total present value of about $2.46 billion.

So far, it is a strategy that has resulted in a loss of 1.51 billion dollars, or 38% of the invested capital.

MicroStrategy has thus far never made any major sales of the BTC it bought, in part because it doesn’t seem to need them as it continues to increase its supply. The hope is probably that the market value of Bitcoin can rise again in the future, and thus in the long term this strategy can become profitable.

For example, if the market price were what it was at the beginning of May, MicroStrategy would be in profit by $1.21 billion, or 31% of invested capital.

In the short term, the price of Bitcoin is volatile, but it is even more so in the long term, so it can certainly be the case sooner or later that the company’s strategy will turn a profit, just as it is possible that it may also eventually turn a loss, and so on.

The mistake that is often made when trying to interpret MicroStrategy’s purchases is to think that they are speculation.

Speculators buy only to sell in the shortest possible time and with the highest possible profit. 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 more risky, 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 are guaranteed to produce losses in the long term, albeit small and with a low level of risk.

Abandoning the dollar

MicroStrategy has decided to completely abandon the dollar reserves by taking a big risk by only keeping BTC, but a middle ground is also possible that allows one to risk a small part of their reserves by investing in Bitcoin while keeping the main part 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, to buy to both high and low prices. Since the price of Bitcoin in dollars in the long run tends to rise above the historical average, it is hoped in this way that the purchase price will eventually be lower than the possible sale price.

In theory, although it is quite difficult, better results can be achieved by avoiding buying when the price is high during large bull runs, and concentrating the purchases in the bear markets. After all, until now the price of Bitcoin has always followed the four-year halving cycle, hence with a major bullrun year followed by a bear market year, a rebound year and a lateralization year.

MicroStrategy has chosen an almost classic DCA, in the sense that although it does not make regular purchases with the same numbers all the time, it converts the dollars it accumulates into BTC when it has them available, without worrying too much about individual purchase prices. In this way, the approximately 130,000 BTC purchased eventually accumulated at an average price of just over $30,000, which is higher than today’s 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 buying at a lower price, and in the event that the bear market sooner or later stops yielding to a rebound year, the strategy that Now apparently, being at a loss suddenly turns into a winning strategy.

The fact that during last year’s apparent bull run they continued to buy even at very high prices, despite starting to buy at $12,000, means that either they thought there would not be a severe bear market as it is now, or that they chose to continue with DCA regardless of market prices. It can also mean both, namely that in the long term they expect an upswing and a new growth phase, but at the same time that they do not intend to stop DCAing under any circumstances.