This Company Just Bought $1.4 Billion of Bitcoin. Should You?

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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Your financial situation is surely quite different from Strategy's

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.

The bull thesis is getting stronger, not weaker

Regardless of how Strategy is implementing its strategy, there's a strong investment thesis for buying Bitcoin, and Strategy's approach actually bolsters that thesis somewhat.

At the core of Strategy's strategy is the fact that Bitcoin's supply is tightly constrained. Only 21 million coins can ever be created (about 19.9 million already are in circulation), and it's only produced in small quantities. It will get harder and harder to produce new Bitcoin over time as a result of its halving schedule. And, with governments and major corporations accumulating the asset in significantly larger quantities than ever, there is more competition for the existing supply.

Furthermore, while the concentration of the coin's supply in the wallets of large holders does introduce a risk that those holders could tank the price by dumping their holdings, such a decline would just be a short-term blip rather than a long-term problem. A bigger consideration for potential buyers is the coin's ability to maintain its purchasing power in fiat currency terms, which is important because it enables the asset to act as a hedge against inflation rather than merely as a store of value.

So yes, you should probably be buying at least some Bitcoin to have exposure to it in your portfolio. Slow and steady wins the race here. Set up a dollar-cost averaging (DCA) plan and gradually build up a position.

Finally, remember that this is a play for the long term. In the long term, it doesn't particularly matter whether Strategy's plan makes shareholders rich or if it burns their money because Bitcoin will be in shorter supply either way.

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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.