Bitcoin has grown remarkably in 2020, despite many things that would normally make investors cautious, including US-China tensions, Brexit and the coronavirus pandemic. From a low of $ 4,748 for the year in mid-March, when fears of a pandemic intensified, bitcoin reached just under $ 30,000 by the end of the year.
Since then, the cryptocurrency has climbed to record levels of over $ 40,000, which has increased the prices of other cryptocurrencies. What led to this huge price increase and is it different from the balloon of 2017?
One of the reasons for the massive rise in prices is that there has been a large influx of investors from large institutions, such as pension and university funds and investment funds. This was not the case during the last bull market in 2017, when the price of bitcoin rose about 20 times to almost $ 20,000 just to return to $ 3,000 a year.
In 2017, the cryptocurrency ecosystem was dominated by individual retail investors, many of whom were attracted by the lack of bitcoin and the fact that it is outside the global financial system. The 2017 market had all the characteristics of a classic financial bubble and investors who buy out of “fear of losing”.
Part of the system
This time, big names like billionaire investor Paul Tudor Jones and insurance giant MassMutual have invested heavily, while even former opponents like JP Morgan now say bitcoin could have a bright future. All this helps to increase confidence in cryptocurrencies and shows that it is becoming more widespread.
Bitcoin is also supported by several big names in the consumer payments market. PayPal now allows customers to buy, hold and sell bitcoins directly from their PayPal accounts. Competing digital payment company Square announced in November that more and more users of Cash applications are buying digital currency and buying on average more than before. The number of providers that accept bitcoin as a payment method is growing rapidly.
Probably the most important thing is that Visa is starting to accept the idea of bitcoin. In October, the company announced several bitcoin-linked credit and debit cards with the cryptocurrency exchange platform Coinbase. With more and more ways to use bitcoin, this should mean that more people will want to own it.
Bitcoin has also become much more mature since the days when it was used primarily as a method of buying drugs in the Silk Road criminal network. Bitcoin wallets, keys and digital exchanges are easier to access and there is much more reliable information than before.
The introduction of financial products, such as futures and bitcoin options, as well as blockchain funds, has allowed investors who would otherwise fear instability to enter the market. Bitcoin futures mean that investors can speculate on falling prices. Nobel laureate Robert Schiller suggested that the 2017 balloon could have been linked to the fact that there were no bitcoin futures at the time.
Beyond the enthusiasm of systemic players, the economic recession due to COVID-19 has led to huge stimulus packages from governments around the world, and many central banks have started to print more money. This can lead to inflation, which in turn decreases people’s purchasing power. In fact, the US Federal Reserve signaled last year that it will be slightly more tolerant of rising prices when it reduces its inflation target by 2%.
Faced with this threat, investments such as bitcoin are perceived as relatively safe. The maximum number of bitcoin that will ever exist is set at 21 million (unless the protocol changes) and there are already about 18.59 million in circulation.
The “printing” of new currencies is also slowing down, as the amount Bitcoin miners receive for checking blockchain transactions is halved every four years – falling from 12.5 BTC to 6.25 BTC in May. This shortage is comparable to the limited supply of precious metals.
Even central banks are beginning to accept cryptocurrencies. Russia, China, Canada, the EU and many others are either already working on central bank digital currencies (CBDCs) or publishing technical documents describing their intentions to do so. This is an obvious sign that the major players in the old financial world consider cryptocurrencies as the future. Meanwhile, the US federal regulator has announced that consumer banks can make payments with “stable currencies”, which are cryptocurrencies linked to traditional currencies.
It seems that the recent rise in bitcoin prices may be more significant than in 2017. But not everyone agrees. David Rosenberg, chief economist and strategist at Rosenberg Research and Associates, believes that Bitcoin is in a bubble, and investors do not understand how it works.
Rosenberg is in a good position to comment on the bubbles, as he is known for identifying the bubble in the US real estate market that led to the global financial crisis of 2008-2009. He believes that investors do not understand how bitcoin works and this is a classic balloon – although he admits that he himself is not an expert in cryptocurrencies. Meanwhile, high price volatility is still a major issue, which will continue to worry some institutional investors.
Who can be trusted? There are many predictions of a huge rise in the price of bitcoin in 2021. Tyler and Cameron Winklevoss, the founders of the Gemini cryptocurrency exchanges, believe that bitcoin will eventually reach $ 500,000 per coin, while a Citigroup analyst estimates a price of 318,000 dollars December 2021
Such players have a high stake in the market and these figures may be too optimistic. In March 2020, however, the prospect of bitcoin reaching $ 40,000 seemed impossible. Wherever the price goes here, the fate of the top cryptocurrency will obviously be one of the biggest financial stories in the world during the year.
Andrew Urquhart is an associate professor of finance at the ICMA Center, Henley Business School and associate editor at the European Journal of Finance, International Review of Financial Analysis and Research in International Business and Finance. He is an expert in financial markets, investor behavior, high frequency trading and cryptocurrencies.