Despite several factors that would ordinarily make investors nervous, such as US-China tensions, Brexit, and, of course, an international epidemic, Bitcoin saw a phenomenal surge in 2020. As pandemic worries spread, bitcoin fell to a year-low of US$4,748 (£3,490) on the daily charts in the middle of March. By the end of the year, it had risen to just around US$30,000.
Since then, it has surged to all-time highs above US$38,000, generating daily headlines and driving up the value of other cryptocurrencies. So, what’s driving this massive price increase, and how is it different from the 2017 bubble?
Price of Bitcoin in US Dollars from 2016 to 21
A substantial flood of investors from large-scale organisations such as pension schemes, university endowment funds, and investment trusts is one cause for the massive price surge. This was not the case during the previous bull market in 2017, when bitcoin’s price soared over 20-fold to nearly US$20,000 before crashing to the low US$3,000s a year later.
Individual retail investors dominated the cryptocurrency ecosystem in 2017, with many drawn to bitcoin’s scarcity and the fact that it operated outside of the global banking system. The 2017 bull market had all of the hallmarks of a traditional financial bubble, with investors purchasing out of “fear of losing out” (FOMO).
This time, prominent names like billionaire investor Paul Tudor Jones and insurance behemoth MassMutual have put their money where their mouths are, and even longtime sceptics like JP Morgan are now predicting a bright future for bitcoin. This all adds to the cryptocurrency’s credibility and signals that it is growing more widespread.
A few major consumer-facing payment companies have also embraced Bitcoin. Customers may now buy, store, and sell bitcoin directly from their PayPal accounts. Square, a competitor in digital payments, said in November that more of its Cash App customers are purchasing digital currency, and that they are buying more on average than previously. The number of merchants who buy bitcoin in Dubai as payment is steadily increasing.
Perhaps most crucially, Visa has become more accepting of bitcoin. It released a number of bitcoin-related credit and debit cards alongside top cryptocurrency exchange Coinbase in October. With more and more methods to use bitcoin, more individuals should be interested in holding it.
The transition to the mainstream
Bitcoin has also matured significantly since its early days as a means of purchasing narcotics on the dark web’s Silk Road. Digital wallets, keys, and exchanges for Bitcoin are now much easier to find, and there is a lot more accurate information available than before.
Financial instruments such as bitcoin futures and options, as well as blockchain-related funds, have made it possible for investors who were previously afraid of volatility to participate. Bitcoin futures allow investors to speculate on the cryptocurrency’s price decreasing by “going short” on it.
Aside from all of this media excitement, COVID-19’s carnage has resulted in massive stimulus packages from governments throughout the world, as well as numerous central banks creating additional money. Inflation might rise as a result, reducing people’s purchasing power.
Faced with this threat, assets such as buy bitcoin in Dubai are being viewed as a store of value. The maximum amount of bitcoins that will ever exist is set at 21 million, with around 18.5 million now in circulation.
Adaptation of Crypto
Cryptocurrencies are being embraced by central banks as well. Russia, China, Canada, the EU, and a slew of other nations are either working on central bank digital currencies or have published white papers outlining their plans. This is a clear indication that the old financial powers that be regard cryptocurrency as the way of the future. Meanwhile, the US Federal Reserve said that retail banks will be permitted to accept stablecoins, which are cryptocurrencies that are anchored to traditional currencies.
As a result, it appears that the latest bitcoin price increase has more substance than in 2017. However, not everyone is in agreement. David Rosenberg, chief economist and analyst of Rosenberg Research and Associates, believes bitcoin is in a bubble and that investors are confused about how it works.
Rosenberg is qualified to remark on bubbles because he is credited with seeing the US housing market bubble that triggered the global financial crisis of 2008-09. Meanwhile, price volatility remains a key issue, which will continue to concern some institutional investors.
These parties clearly have “skin in the game,” and these figures may be overly optimistic. The thought of bitcoin reaching US$30,000 in March 2020, on the other hand, appeared improbable. Regardless of where the price goes from here, the fortunes of the world’s most popular cryptocurrency will undoubtedly be one of the year’s most important financial stories.
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