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Tuesday, April 13, 2021

Bitcoin: Why the Price Has Exploded—And Where It Goes from Here

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At the end of 2020, Bitcoin witnessed a meteoric rise in its value despite many factors that are threatening the stability of the global economy, which includes the US-China tensions, Brexit, President Joe Biden’s administration’s $1.9 trillion stimulus package, and, of course, the COVID-19 pandemic. In mid-March, the price of one Bitcoin came at the lowest at US$4,748 as the pandemic spread. But, at the end of the year, the price soared to just under US$30,000. Since then, Bitcoin rose to its all-time high exceeding US$38,000.

The upward price rally of Bitcoin did not end there. Bitcoin price made major headlines at the beginning of February this year, and this time it is from an automaker.  The cost of Bitcoin surged to new all-time highs of close to $44,200 when Tesla CEO Elon Musk joined hands with other institutional investors and investment banks. As of now, the price of Bitcoin stands at US$ 53,008.50.

Since then, Bitcoin has been in the news media’s headlines day after day, which has a domino effect on other cryptocurrencies’ prices. The price of Bitcoin has driven up other cryptos prices simultaneously, such as Ethereum, which traded above at a record high at $1,700 for the first time in February. Ethereum happens to the second-largest cryptocurrency by market value after Bitcoin.

So, the question remains: What factors have driven this massive price appreciation of Bitcoin? Will this unstoppable price appreciation bubble burst like it did in 2017?

Bitcoin/US Dollar Price 2016-21

One of the significant reasons for Bitcoin’s massive price rise is an increasing number of institutional investors from pension funds, investment trusts, and university endowment funds are buying Bitcoin. These did not occur during 2017, where the bitcoin price climbed to almost 20-fold at around US$20,000. The price appreciation did not hold up for long as a year later, it slides back to as low as US$3,000. The year 2017 was a bull market for Bitcoin primarily dominated by individual retail investors. They were attracted to the world’s largest cryptocurrency due to its scarcity and the fact that it circumvented the global financial system. The year has all the classic symptoms of an economic bubble, and most investors buying Bitcoin did because they did not want to miss out on making huge gains.

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Bitcoin Turns Mainstream

The fate of cryptocurrencies changed in 2020. It is the year Bitcoin, alongside few other cryptocurrencies, including Ethereum, started becoming more mainstream. This time big investors like Paul Tudor Jones and significant corporations like MassMutual have invested heavily in Bitcoin. Banking giant JP Morgan, a long-time critic of Bitcoin, now says the bitcoin price could appreciate further, signalling its bright future.

All this enhanced the credibility of the cryptocurrency. Furthermore, Bitcoin grabbed the attention of significant consumer payment companies, including PayPal.  PayPal enabled its customers to buy, sell, and hold bitcoins directly from their PayPal accounts. In a counter move, rival company Square announced in November last year that their Cash App users are purchasing more Bitcoin on average than before. The point is that the number of vendors accepting bitcoin as a legit payment method is rising.

Most importantly, Visa in October announced that it would be issuing a limited number of bitcoin-related credit and debit cards that will be allowed to use in well-known cryptocurrency exchange Coinbase. We have also seen financial instruments such as bitcoin options and futures and blockchain-related mutual funds. Overall, all these significant developments indicate that Bitcoin is now more mature and mainstream, clouding its former image of being used as a payment method to buy drugs on the dark web.

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Hedging Inflation with Bitcoin

The implications of the COVID-19 pandemic are far and wide. The pandemic has put business and our daily lives in total disarray. Governments worldwide are rolling out substantial stimulus packages, with central banks are printing more money to offset this carnage. It could have devastating effects in the long term, if not in a short period. Many economists agree that these massive stimulus packages could drive up inflation lowering people’s purchasing power. The US Federal Reserve last year highlighted that inflation could hit the 2% target.

In these adverse situations, investors are turning to Bitcoin as a store of value. Unlike fiat currencies, bitcoins have had a fixed supply, and only 21 million Bitcoins will be issued. There are already close to 18.5 million Bitcoins in circulation. The number of new Bitcoins is also slowing because the cryptocurrency is undergoing a ‘halving.’ See, Bitcoin miners get a reward for verifying the blockchain’s transactions. That reward is reduced to half after every 210,000 blocks are mined or after every four years. The tips for mining bitcoin fell from BTC 12.5 to BTC 6.25 last May. This type of scarcity is comparable to gold or silver.

Central banks from the EU, Russia, China, Canada, and many others are warming up to cryptocurrencies. Many of them are in the process of issuing central bank digital currencies (CBDCs) for their own countries. It is an ominous sign that cryptocurrencies, once a pariah of the global financial system, are becoming ever more mainstream and acceptable payment modes in the future.

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So, What’s Next for Bitcoin?

It has become apparent that Bitcoin and some other major cryptocurrencies have made their mark and have become more mainstream and accepted by people and investors alike. The recent appreciation of the price of Bitcoin is not comparable to what happened in 2017, and it indeed has more substance to it, but not everyone agrees. David Rosenberg, the chief economist, and strategist at Rosenberg Research and Associates, still believes Bitcoin is in a bubble. It will face the same fate as it did in 2017, mainly because investors do not understand its functions. 

We will not thoroughly brush off Rosenberg’s comments regarding financial bubbles—after all, he is infamous for predicting the US housing market bubble global, resulting in the financial meltdown of 2008-09.  So, where do we go from here? There is still plenty of well-placed assumptions to believe the value of Bitcoin will rise in 2021. Tyler and Cameron Winklevoss, the founders of Gemini, a leading crypto exchange, believe bitcoin will soar to US$500,000 by 2021. A Citigroup analyst also agrees to it as he suggested the price per Bitcoin will reach US$318,000 by December 2021. Whatever the price predictions are—it is needless to say the Bitcoin will create significant headlines in the year ahead.

To get the latest news, updates, and broker reviews in the cryptocurrency space, visit BrokerChoices.com.

Thanks For Reading 
More Read On Forbes Magazine 

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