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A narrative shift for Bitcoin

Public perception of cryptocurrencies has been changing. What does that mean?

Narrative shifts are an important aspect of investing that often get overlooked. A narrative shift is when there is a change in prevailing thoughts, opinions, or stories about an investment's future prospects. Markets are forward-looking so major changes to future expectations will have an immediate impact on the price of an investment. This lesson dives deeper with several examples of narrative shifts.

By Nathan Gurr

Technical analysis for crypto

We can use technical analysis, making our investment decisions based on price movements. A site like CoinGecko can provide us the pricing data while this lesson on charts and technical analysis will show us how to apply the technique.

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How did MicroStrategy buy bitcoin?

MicroStrategy used a professional dollar cost averaging strategy to make such a large investment. Check out this overview of dollar cost averaging to learn some of the benefits it provides.

In order to buy nearly 17,000 bitcoin (BTC):

  • they traded continuously for 74 hours, executing over 88,000 trades at around 0.19 BTC every 3 seconds
  • this ended up being around $39,000 per BTC per minute
  • but, there were times when they were ready to purchase $30-50 million in a few seconds if the price of BTC dropped more than 1-2%
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Bitcoin on the balance sheet

MicroStrategy became the first example of a public company to make a significant investment in Bitcoin as a reserve asset for cash. This is a major step for Bitcoin as an asset class because of the legal requirements, as well as the checks and balances, that public companies have to go through when they spend their cash or where they store their cash reserves.

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Why do companies use dollar cost averaging instead of buying all at once?

MicroStrategy's board members and executives were looking to diversify their cash holdings into other alternative investments, including Bitcoin.

It's likely there would have been a large spike in the price of Bitcoin if MicroStrategy made the $175million investment all at once. This would have meant they would get fewer Bitcoins per dollar invested. The dollar cost averaging strategy prevented a large spike in the price by placing many small orders over a period of time.

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Has there been a shift in corporate sentiment toward Bitcoin?

This investment was quite an adventurous move for a public company. It took about six months to convince the board, major stakeholders, and investors that buying Bitcoin was a feasible strategy and would not hurt the long-term outlook for the business or the stock price.

While it will take time for more public companies to make similar investments, it is clear that conversations are being had in boardrooms about Bitcoin being an acceptable asset class which is a very positive narrative shift for cryptocurrency.

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Corporate venture funds vs cryptocurrency

Some large companies that have proven themselves winners in the market have excess cash that they will use to create their own corporate investment arms. For some venture backed companies, they take the venture funds that they receive from investors and invest it themselves into other startups. 

Comparatively speaking, using cash reserves to invest in startups seems equally risky, if not more, as Bitcoin - especially when considering the volatility of investing in any early stage company.

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How do I value crypto?

How can we create a set of principles that help us determine what is a reasonable price to pay for a cryptocurrency? Luckily, some of the same strategies that we apply to buying stocks can be applied here.

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Fundamental analysis for crypto

We can also use fundamental analysis, which means looking at the volume and quality of underlying products and services as well as usage data. In the realm of crypto, this would mean considering some of the following:

  • the number of active live decentralized applications being built on the blockchain
  • the daily active users for those applications
  • the transaction volumes within these applications, rather than the transaction volume of the currency itself

The difficulty with this method is actually finding the fundamental user data for these products/services

We can always go back to this introduction to crypto for a refresher on how blockchains and cryptocurrencies work.

At Archimedes, our goal is to make investment literacy accessible and free for everyone.

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