Why Bitcoin's (BTC 0.52%) price isn't even more volatile

With so many different forces affecting its value at all times, it's remarkable that Bitcoin's (BTC 0.52%) price isn't even more volatile

With so many different forces affecting its value at all times, it's remarkable that Bitcoin's (BTC 0.52%) price isn't even more volatile. So when there's significant purchasing action by a large holder that claims to want to hold on to its hoard of the coin forever, like there has been over the last couple of weeks, it's worth paying attention to.

After all, high-profile buying could be interpreted as a tailwind for higher prices. Or it could be viewed as a risk, since it might precede later news of the same actor ditching its position for greener pastures.

With those dynamics in mind, let's break down who's buying it right now and why it could be an important factor in the coin's performance over the coming years.

Is it worth following this whale's move?

Strategy (MSTR 5.20%), which was originally a software business known as MicroStrategy but now claims to be a Bitcoin treasury, just purchased $555.8 million of Bitcoin in the week of April 14 through April 20, bolstering its smaller purchase of $285.5 million during the week ending on April 14.

It now has about $36.5 billion of the asset, which it procured using funds from a combination of borrowing and stock issuance, for an average price of $67,766 per token. These sizable purchases come on the heels of an even larger one executed at the end of March, which was worth $1.9 billion.

Given that Strategy has been loath to sell its Bitcoin so far, and that it might not ever do so unless forced to, some investors could interpret its ongoing confidence in the coin as a reason to buy it. After all, it controls around 2.5% of all the crypto that's currently in circulation, which is actually a very large proportion for an asset that's highly distributed and decentralized in nature.

With that much supply taken off the market, it will increase the competition among buyers for the remaining portion that's still for sale, which will drive prices up over the medium and long terms. Especially when paired with Bitcoin's other scarcity-generating mechanics, like its increasing mining difficulty over time, this kind of supply control can make it far more expensive for future buyers to secure a position of their own, significantly rewarding those who got in earlier, like Strategy.

At the same time, investors may also be interested in buying more Bitcoin because of the publicity that Strategy's purchases tend to bring. There's something compelling in the narrative of having a major evangelist for an asset that's proudly buying it at practically any price.

What's more, having a powerful advocate for the strategy of simply buying and holding Bitcoin is something that holders can benefit from, since it encourages the investor behavior that drives the price up over time.

Be aware that this is a risk

There is a bit of a possible downside to Strategy's purchasing activity. The company uses issuance of debt and equity to fund its purchases, as mentioned previously. That means if the price of Bitcoin drops enough, it could be forced into liquidation of its assets to make its creditors whole.

In other words, it could be forced into selling large volumes of its crypto, thereby potentially creating a downward spiral in the coin's price.

That outcome might not happen. Still, if Strategy continue to procure more and more of Bitcoin's total supply, the risk will increase, so it's important to recognize. There is no reason to hold off on buying the coin, but it is worth keeping an eye on, because a forced-selling cascade could actually be a good buying opportunity if it ever happens, assuming you can stomach buying the dip.

Overall, for now, Strategy's repeated public commitments to never selling any Bitcoin and its repeated purchasing of even more are a minor to moderately strong bullish tailwind. But, as a matter of principle, a big investor loading up on an asset cannot be a part of the investment thesis for that asset or a significant reason for buying it; that's simply bad investing form to try to borrow someone else's conviction to make a decision for yourself, and it never works in the long run anyway.

So buy Bitcoin if you're willing to hold it, but don't feel any pressure to copy what Strategy does.