Bitcoin experienced a spectacular rise in 2020 despite many factors that normally would make investors nervous, such as US-China tensions and Brexit. After a low of US$4,748 in mid-March, as pandemic concerns took hold, Bitcoin rose just under US$30,000 at the end of the calendar year.
Since then, it has reached all-time highs of US$38,000. This has made headlines every day while driving up the price of other cryptocurrencies. What has caused this price increase, and is it similar to the boom of 2017?
Bitcoin/US$ Price 2016-21
Read more: Why is Bitcoin’s price at an all-time high? And how is its value determined?
One reason for the massive price rise is that there has been a big influx of investors from large-scale institutions such as pension schemes, university endowment funds, and investment trusts. This was not the case during the last bull market in 2017, in which the bitcoin price rose about 20-fold to almost US$20,000, only to slide back to the low US$ 3,000 a year later.
In 2017, retail investors dominated the cryptocurrency ecosystem. Many were attracted by Bitcoin’s scarcity, as well as the fact that the crypto-ecosystem was outside of the global financial system. Investors who bought in fear of missing out (FOMO) were the main drivers of the 2017 bull market.
The Move mainstream
Even former skeptics like JP Morgan now say that Bitcoin has an exciting future. All of this helps increase the trust in cryptocurrency and shows that it’s becoming more mainstream.
Bitcoin is also backed by some of the largest consumer-facing payment names. PayPal allows users to purchase, hold, and then sell bitcoins directly from their PayPal account. Square, a rival digital payment company, reported that in November, more Cash App users were buying digital currency, and they are also buying more. The vendors who accept bitcoin are increasing rapidly.
Visa has been warming up to bitcoin. In October , it announced several bitcoin-related debit and credit cards in partnership with Coinbase. More and more people are likely to want bitcoin as there are more ways to use it.
Bitcoin is also more mature than it used to be when it was primarily used as a way to buy drugs on the dark Web via the Silk Road. Bitcoin keys, wallets, and exchanges can be accessed more easily, and the information available is much more reliable than it was before.
Investors who were previously afraid of volatility can now participate in the market with products like bitcoin futures, options, and funds. Bitcoin futures allow investors to speculate on falling cryptocurrency prices by “going long” on it. Nobel laureate Robert Shiller suggested that the 2017 bubble may have been due to the lack of bitcoin futures.
Read more: Bitcoin’s rebound: 3 reasons this bubble may not burst.
The inflation hedge
Aside from all the mainstream enthusiasm, COVID-19’s carnage has led to massive stimulus packages by governments across the globe. Many central banks have also printed more money. This could lead to inflation and lower people’s purchasing power. In fact, the US Federal Reserve indicated last year that it would be slightly more tolerant of rising prices by relaxing its target of 2% for inflation.
Investments like bitcoins are considered a haven in the face of such a threat. The maximum number of bitcoins that will ever exist is set at 21 million (unless the protocol changes) and has been halved roughly every four years. It fell from BTC12.5 in May to BTC6.25 this past May. This scarcity is similar to precious metals.
Can you dig it? SPF
Even central banks have embraced cryptocurrencies. Russia, China, Canada, the EU, and many other countries are either working on Central Bank Digital Currency for their country or have published white papers detailing their intention to do so. The financial powers of the past are looking to cryptocurrencies for the future. The US federal regulator announced retail banks could make payments using stablecoins. These are cryptocurrencies that are pegged to traditional currency.
The recent bitcoin price increase may, therefore, have more substance than it did in 2017. But it’s not the consensus. David Rosenberg is the chief economist and strategist of Rosenberg Research and Associates. He believes that Bitcoin is in a bubble and that investors do not understand how it functions.
Rosenberg has a good understanding of bubbles, having identified the US housing bubble, which led to the global economic crisis in 2008-09. He thinks investors do not understand bitcoin and that it’s in a classic bubble, where people follow the herd (though he has admitted he is not an expert on cryptocurrency). The price volatility is a concern for some investors, as it will continue to be a big issue.
What should you believe? Many people are very bullish about the price of bitcoin in 2021. Tyler and Cameron Winklevoss are the founders of Gemini, a leading crypto exchange. They predict that bitcoin will eventually reach US$500,000. A Citigroup Analyst forecasts a price of US$318,000 in December 2021.
These numbers are likely to be optimistic, as these parties clearly have “skin” in the game. In March 2020, the idea of Bitcoin reaching US$30,000 was unthinkable. Whatever the future price of Bitcoin, it will be a major financial story in the coming year.