Bitcoin: why the price has exploded – and where it goes from here

Bitcoin made a notable gain in 2020 despite many things that would normally make investors wary, including US-China tensions, Brexit, and of course an international pandemic. From a yearly low on the daily charts of $4,748 (£3,490) in mid-March as fears of a pandemic took hold, bitcoin rose to just under $30,000 by the end of the year.

Since then, it has risen to all-time highs above $38,000, grabbing headlines day after day and driving up the prices of other cryptocurrencies at the same time. So what has driven this huge price appreciation? Is it different from the 2017 bubble?

Reading: Why did bitcoin go up

bitcoin price/US dollars 2016-21

read more: why is bitcoin price at an all time high? And how is its value determined?

One of the reasons for the massive increase in prices is that there has been a large influx of investors from large-scale institutions such as pension plans, university endowment funds and mutual funds. This was not the case during the last bull market in 2017, in which the price of bitcoin rose 20-fold to almost US$20,000, only to fall back to as low as US$3,000 a year later.

In 2017, the cryptocurrency ecosystem was dominated by individual retail investors, many of whom were attracted by bitcoin’s scarcity and the fact that it was outside the global financial system. the 2017 bull market had all the signs of a classic financial bubble and investors buying out of “fear of missing out” (fomo).

the conventional movement

This time around, big names like billionaire investor paul tudor jones and insurance giant massmutual have invested heavily, while even former detractors like jp morgan now say bitcoin could have a bright future. all of this helps to increase confidence in the cryptocurrency and indicates that it is becoming more mainstream.

See also: US passes China as biggest bitcoin mining hub after Beijing ban

Bitcoin has also been endorsed by some big consumer-facing payment names. PayPal now allows customers to buy, hold and sell bitcoins directly from their PayPal accounts. Rival digital payment firm Square reported in November that more users of its cash app are buying the digital currency and buying more on average than before. The number of providers that accept bitcoin as a form of payment is growing rapidly.

Possibly most importantly, visa has been warming to bitcoin. In October, it announced a handful of bitcoin-related credit and debit cards with a leading crypto exchange currency base. With more and more ways to use bitcoin, it should mean more people will want to hold it.

Bitcoin has also become much more mature since the days when it was primarily used as a method to buy drugs on the dark web on the Silk Road. digital bitcoin wallets, keys and exchanges are easier to access and there is much more reliable information than ever before.

The introduction of financial products such as bitcoin futures and options, as well as blockchain-related funds, has allowed investors who might otherwise have feared volatility to get involved. Bitcoin futures mean that investors can speculate on falling prices by “going short” the cryptocurrency. Nobel laureate Robert Shiller has suggested that the 2017 bubble might have been related to the fact that there were no bitcoin futures at the time.

read more: the bitcoin rebound: 3 reasons why this bubble cannot burst

the hedge against inflation

In addition to all this widespread enthusiasm, the carnage caused by covid-19 has led to huge stimulus packages from governments around the world and many central banks printing more money. this could increase inflation, which in turn reduces people’s purchasing power. Indeed, the US Federal Reserve signaled last year that it would be a bit more forgiving of rising prices when it relaxed its 2% inflation target.

In the face of this threat, investments like bitcoin are considered a store of value. the maximum number of bitcoins that will exist is set at 21 million (unless the protocol changes), and there are already around 18.5 million in circulation.

See also: Buying a Car with Cryptocurrency 2022 | Bankrate

The supply of new coins is also slowing because the reward bitcoin miners receive for verifying transactions on the blockchain is halving roughly every four years – it fell from btc12.5 to btc6.25 in last May. this scarcity is comparable to that of precious metals.

even central banks are embracing cryptocurrencies. Russia, China, Canada, the EU and many others are already working on central bank digital currencies (CBDCs) for their countries or publishing white papers detailing their intentions to do so. this is an obvious sign that the powers that be in the old financial world are seeing cryptocurrencies as the future. Meanwhile, the US federal regulator has announced that retail banks can make payments with stablecoins, which are cryptocurrencies pegged to traditional currencies.

where next

So it looks like the recent bitcoin price appreciation may have more substance than 2017, but not everyone agrees. Rosenberg Research and Associates Chief Economist and Strategist David Rosenberg believes that Bitcoin is in a bubble and investors don’t understand how it works.

Rosenberg is well placed to comment on bubbles, as he is known for identifying the bubble in the US housing market that led to the global financial crisis of 2008-2009. he believes that investors don’t understand how bitcoin works and is in a classic follow-the-herd bubble (although he has since admitted that he is not a cryptocurrency expert himself). meanwhile, high price volatility remains a major issue, which will continue to concern some institutional investors.

then what to believe? There are many very bullish forecasts for the price of Bitcoin in 2021. Tyler and Cameron Winklevoss, the founders of leading cryptocurrency exchange Gemini, believe that Bitcoin will eventually hit $500,000 per coin, while a Citigroup analyst suggests a price of US$318,000 for December 2021.

Obviously these parts have “skin in the game” and these numbers may be too optimistic. however, in March 2020, the prospect of bitcoin reaching US$30,000 seemed impossible. Wherever the price goes from here, the fortunes of the leading cryptocurrency will clearly be one of the world’s biggest financial stories in the year ahead.

read more: bitcoin: this year I will earn 200 million dollars more than elon musk

See also: 5 Great Pieces of Investment Advice From Bill Gates | The Motley Fool


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