Bitcoin crossed US$20,000 on Wednesday for the first time, the latest milestone in a rally that has made it the best-performing investment of 2020. Bitcoin was trading just above $20,500 on Wednesday morning, up 180% for the year.
Bitcoin has crossed $19,000 several times this year, after first hitting that number in 2017. But it consistently faltered just before hitting $20,000 and had fallen below $4,000 as recently as March.
It is nearly impossible to explain Bitcoin’s price changes, but analysts had described $20,000 as a key psychological level—like other big round market numbers that don’t mean very much on their own.
The rise has been fueled this year by institutions, which have been growing more comfortable with Bitcoin and even holding some on their balance sheets. Massachusetts Mutual Life Insurance Company (MassMutual), an institution that has been around for 169 years, announced last week that it had bought $100 million in Bitcoin, joining companies like Square (ticker: SQ) that have already bought in.
The enthusiasm is filtering down to retail investors, who now have more options to buy crypto, including through their PayPal Holdings (PYPL) accounts.
News that big companies are buying in “swells consumer interest,” says Nigel Green, founder and CEO of deVere Group, a financial advisory and fintech firm.
There is no generally accepted way to value Bitcoin, and it produces no cash flows. But high demand can spur price increases, because the cryptocurrency’s software limits its supply to 21 million. More than 18.5 million Bitcoins have already been created.
If Bitcoin can hold this level, some analysts are predicting sharp moves higher.
“If Bitcoin is able to stay meaningfully above $20,000 for a few days, we would expect prices to move significantly higher over the next six months,” says Greg King, CEO of Osprey Funds, the digital asset subsidiary of REX Shares.
But exciting numbers like $20,000 can be dangerous with a volatile asset like this. Cryptocurrency exchange OKEx and blockchain data firm Kaiko released a report this month showing that large traders tend to sell their positions just as smaller traders jump in — meaning the “smart money” may be unloading crypto as soon as they see hype-fueled rallies like this. And with selling pressure, the price can turn south in a hurry.
“When Bitcoin rallies, the market tends to forget previous, long-drawn-out bearish stretches, and the sentiment shifts to manic euphoria,” the report notes.
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When will Berkshire Hathaway stop selling Bank of America stock?
Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)
The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.
It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.
Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.
Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.
Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.
With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.
Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.
New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.
“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.
He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.
If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.
Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.
Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.
Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.
There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.
Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.
It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.
Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.
Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.
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