Bitcoin’s unprecedented price explosion has many investors dazzled. In this post, we will take a look at bitcoin: reasons behind the price explosion and what’s next.
Bitcoin: Reasons Behind the Price Explosion and What’s Next?
Bitcoin attained an impressive increase in 2020 in spite of numerous things that would usually make investors careful, such as the US-China tensions, Brexit, and, naturally, the covid 19 caused financial crisis. From a year-low on the everyday charts of $4,748 in the middle of March, as pandemic worries took hold, bitcoin rose to just listed below $30,000 by the end of the year.
Ever since it has reached all-time highs above $38,000, making headlines day after day and increasing the prices of other cryptocurrencies at the same time. So what has driven this enormous price hike and is it a far cry from the bubble of 2017?
One reason for the massive price hike is that there has actually been a huge increase of investors from dominant institutions such as pension plans, university endowment funds, and investment trusts. This was not the case throughout the last bull market in 2017, in which the bitcoin price rose up to nearly $20,000, just to relapse to the low $3,000 s a year later.
In 2017, the cryptocurrency community was dominated by individual small-time investors, much of whom were brought in to bitcoin’s shortage and the fact that it stood outside the worldwide financial system. The 2017 bull market had all the indications of a timeless monetary bubble and investors who were buying in “fear of missing out” (FOMO).
Bitcoin Moves Mainstream
This time, big names such as billionaire investor Paul Tudor Jones and insurance colossus MassMutual have actually invested large amounts of money, while even former skeptics like JP Morgan now say that bitcoin might have a great future. All these developments help to increase trust in the cryptocurrency and shows that bitcoin is now a mainstream asset.
Bitcoin has also been backed by some large consumer-facing payment organizations. PayPal now permits its customers to buy, hold, and offer bitcoin straight from their PayPal accounts. Rival digital payment organization Square reported in November that more of its Cash App users are buying the digital currency, and purchasing more usually than in the past. The number of vendors using bitcoin for their transactions is growing fast.
But wait, there is more. Visa is also taking a look at bitcoin. In October it revealed a small number of bitcoin-related credit and debit cards with leading crypto exchange Coinbase. As the ways to use bitcoin multiply, there is no doubt that the number of people who will want to hold it will multiply too.
There is no doubt that Bitcoin has actually become far more mature considering the days when it was utilized mainly as a technique to acquire drugs on the dark web on Silk Road. Bitcoin wallets, bitcoin keys, and exchanges are much easier to gain access to and there are much more trustworthy details out there than previously.
The introduction of commercial investment products such as bitcoin options and futures, as well as blockchain-related funds, has actually enabled investors who might otherwise have been afraid of volatility to get involved. Bitcoin futures indicate that investors can guess or speculate on falling prices by “going short” on the cryptocurrency. Nobel laureate Robert Shiller has recommended that the 2017 bubble might have been linked to the reality that there were no bitcoin futures at the time.
Bitcoin Protects Against Inflation
Besides all this mainstream enthusiasm, the havoc brought by COVID-19 caused economic crisis has actually triggered substantial stimulus packages from governments around the world and most central banks are printing large amounts of money. This will drive up inflation, which in turn reduces people’s buying power. Certainly, the United States Federal Reserve in 2015 signified it would be somewhat more tolerant of increasing rates when it relaxed its 2% inflation target.
In the face of this risk, investing in bitcoin is considered to be a store of value. It is well known that there will be no more than 21 million bitcoins mined unless for some reason the protocol changes. Right now there are over 18,5 million bitcoins in circulation.
In addition, the supply of new bitcoins is likewise decreasing due to the fact that the reward that bitcoin miners receive for confirming transactions on the blockchain halves approximately every four years— it fell from BTC12.5 to BTC6.25 last May. This scarcity is comparable to that of rare-earth elements.
Furthermore, central banks are joining the cryptocurrency game. Russia, China, Canada, the EU, and lots of others are either currently dealing with reserve bank digital currencies (CBDCs) for their nations or releasing white papers detailing their intentions to do so. This is an apparent sign that the powers that be in the old monetary world are definitely seeing cryptocurrencies as the future. In the meantime, the Fed has revealed that retail banks can perform payments with stablecoins, which are cryptocurrencies pegged to conventional currencies.
For that reason, seems that the recent bitcoin price-hike may have more realism than in 2017. However, not everybody seems to share that opinion. Chief economist and strategist at Rosenberg Research and Associates, David Rosenberg, believes bitcoin remains in a bubble, and financiers do not comprehend how it works.
Rosenberg is well-positioned to discuss bubbles considering that he is understood for recognizing the United States real estate market bubble that caused the global monetary crisis of 2008-09. He believes investors have no idea how bitcoin works and right now the classic, follow-the-herd bubble phenomenon takes place (though he has admitted that he is no professional on the cryptocurrency market himself). Nevertheless, some large firm investors still worry that large volatility in the price could still be an issue.
So what to think? There are lots of very bullish projections for the bitcoin price in 2021. Tyler and Cameron Winklevoss, the creators of leading crypto exchange Gemini, are both adamant that bitcoin will eventually hit $500,000 while a Citigroup analyst suggests a price of $318,000 by December 2021.
There is no doubt these crypto-experts do know what they are talking about. However, my opinion is that these numbers may be too optimistic. Nevertheless, ten months ago the possibility of bitcoin reaching US$ 30,000 seemed hardly possible. Wherever the price goes from here, the fortunes of the leading cryptocurrency are plainly going to be among the world’s most significant financial stories in the year ahead.
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