Bitcoin Gets Even More Real as Germany Gives Blessing
Institutions are rushing into Bitcoin (BTC), and I strongly believe the new demand could push the price of the digital coin back to $65,000 in the days ahead.
Starting today, Aug. 2, the German government will allow institutional funds that currently control $2.1 trillion to invest up to 20% of their assets in Bitcoin. This mainstreaming of crypto is a big development.
It means prices have a strong possibility to surge.
The bearish argument against crypto is that digital coins don’t represent a store of value, and therefore, there’s no demand from so-called real investors.
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However, institutional investors are as real as it gets … and the rule change in Germany is likely the result of intense lobbying by professional investors clamoring for the opportunity to add Bitcoin, even for their most conservative accounts.
And by the looks of it, institutional demand for Bitcoin is significant.
Last year, Paul Tudor Jones and Stanley Druckenmiller, two titans of the hedge fund world, began allocating funds to cryptocurrency.
A portfolio manager at Soros Fund Management told Bloomberg in March that intuitional investors see Bitcoin as a hedge against shrinking fiat currencies.
Global central banks are creating new currency at an unprecedented rate. The Federal Reserve is currently buying $120 billion worth of Treasury and mortgage-backed securities every month. The dollars used to fund these purchases are being digitally created out of thin air.
Although the economy has improved, and many would argue inflationary pressures are building, there’s no sign this strategy to flood the system with liquidity will change anytime soon.
The number of Bitcoin is capped at 21 million. It’s decentralized and cryptographically secure. Nobody has direct control. And blockchain, its public digital ledger, can’t be altered for any reason. It’s a permanent record of every transaction.
Scarcity and protection against fiat currency devaluation is the argument for Bitcoin — and that’s exactly why professionals want in.
The German strategy shift impacts Spezialfonds, fixed-asset investments that are only accessible by pension companies and insurance funds, according to a report Saturday at Bloomberg.
Bitcoin’s mainstreaming follows a decision in February at The Bank of New York Mellon Corp. (NYSE: BK), the nation’s oldest bank. The Wall Street Journal reported the giant custody bank would begin to hold, transfer and issue cryptocurrencies on behalf of its asset manager clientele.
Bitcoin traded this weekend up to around $42,500. The cryptocurrency now has risen for 10 consecutive sessions after briefly falling below $30,000 on July 20.
Significant price surges have followed these periods of accumulation in the past. There is resistance at $44,740, then free sailing all the way to the old high at $65,000 could be quite possible.
All of these exciting developments bring me to MicroStrategy Inc. (Nasdaq: MSTR). MicroStrategy is the mullet of tech businesses.
Upfront, it’s all business. The company is a profitable, buttoned-down enterprise software company. In the back, the firm is pure party.
It’s a leveraged Bitcoin investment. The Tysons Corner, Virginia-based company now holds 105,000 Bitcoin.
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In 2020, CEO Michael Saylor decided that owning Bitcoin would create more shareholder value than holding cash. Then, Saylor started selling debt to buy even more Bitcoin. He has even issued convertible stock to buy Bitcoin.
And most recently, the firm completed a Dutch auction to potentially buy more again. The average cost of Bitcoin acquired by MicroStrategy is $26,080.
The strategy might seem reckless, yet shares of the company have zoomed from about $120 in 2020 to a peak of $1,305 in February 2021.
It helps that the software business generated $83.8 million in free cash flow during the past 12 months. That’s ample to run the business and service debt. The outcome is a leveraged Bitcoin investment with capable managers.
In theory, the leverage should give MicroStrategy shares a premium to a simple Bitcoin investment. This assumes the price of the digital coin continues to rise.
The German news — and the arrival of more institutional investors — strongly suggests that will be the case. A lot of new money is headed into Bitcoin.
Investors looking for a leveraged Bitcoin play should consider buying MicroStrategy shares.
Jon D. Markman