The cryptocurrency was quiet for years, but it’s starting to boil over once again. With the price of Bitcoin up 550%, it certainly seems like the sky is the limit.
Whether or not you choose to trade Bitcoin or any other cryptocurrency; it is important to understand what it is and the trends driving it.
The bottom line, however, is that the world’s money is flowing onto the blockchain; and the use of cryptocurrency is growing at an exponential rate.
Bitcoin’s rapid climb back in 2017 was swiftly followed by sell-offs that erased the bulk of its quickly earned gains. But no such trend has emerged this time around; and experts say a combination of factors fueled the token’s surge through 2020 and will continue to boost bitcoin in the new year.
Detailed below are three reasons behind bitcoin’s price spike; and a discussion of why it’s unlikely to suffer a crash similar to that seen two years ago.
(1) Fear of missing out
While passionate retail investors powered bitcoin’s 2017 rally, public companies sparked the token’s latest climb.
MicroStrategy started a chain reaction when it bought $425 million worth of bitcoin in August and September, Jimmy Nguyen; president of the Bitcoin Association, told Insider.
The move opened the door for other public companies to view bitcoin as a viable reserve asset.
Square followed in October with its own $50 million purchase . Still, it wasn’t until PayPal adopted bitcoin that prices began to rocket higher.
The company announced on October 21 that it would allow its hundreds of millions of users to buy, sell, and hold bitcoin.
“People are seeing a move to it as a reserve asset, knowing there’s a limited supply of Bitcoin, and saying, ‘okay; I want my piece of it before it goes too high in price,” Nguyen said.
The subsequent rise in bitcoin prices then pulled institutional investors into the fray. Fund managers who previously balked at the token; and its violent price swings feared they were missing out on strong returns and began shifting some cash into the cryptocurrency.
Institutional investors have since pushed billions of dollars into the cryptocurrency market.
Their involvement has played the biggest part in the token’s meteoric rise through the end of 2020, according to Douglas Borthwick; chief marketing officer at digital-asset trading platform INX.
“If you don’t have something in your portfolio that’s performing well, then you’re not going to perform well. People are going to leave your fund,” Borthwick told Insider. “You’ve got larger and larger position sizes chasing a smaller and smaller number of bitcoin in circulation.”
(2) Demand for inflation hedges
Bitcoin may first seem completely disconnected from the coronavirus pandemic, but the health crisis’ fallout has played a critical role in supporting token prices. Governments around the world passed several trillion dollars worth of fiscal stimulus to pad against the pandemic’s economic damage.
The influx of fresh currency and easy monetary conditions boosted the case for bitcoin as a hedge against inflation, JPMorgan analyst Nikolaos Panigirtzoglou said in November. A limited supply of 21 million tokens and insulation from policy decisions saw the token serve as an alternative to gold and other hedge assets.
(3) Increase legitimacy
Companies and institutional investors warming up to bitcoin has given legitimacy to an asset recently known more for its murky uses than its investment potential. During the token’s 2017 rally, those less familiar with cryptocurrencies associated them with “nefarious activities,” Borthwick said.
PayPal’s adoption and the influx of institutional funds lend bitcoin new legitimacy and interest among retail investors, Borthwick added. And just yesterday, the US Office of the Comptroller of the Currency said national banks can use blockchain networks and stablecoins for payments, further legitimizing digital currencies.
“The more big names get involved in the space and the more regulators start writing regulations about it, the more it becomes a mainstream asset,” Borthwick said.
Curiosity among everyday investors exploded through the end of last year. Global search interest for bitcoin more than tripled from early October to early January, according to Google Trends data . Celebrities ranging from actress Maisie Williams to rapper Meek Mill have tweeted about entering the cryptocurrency market. In a matter of months, the crowd pushing cash into bitcoin has evolved from fund managers and crypto-fanatics to practically everybody else, Borthwick said.
“There’s an absolute land rush to get invested in the crypto space,” he added. “It’s no longer friends and family and old friends from college.”
What’s ahead for the red-hot cryptocurrency
Bitcoin’s rapid doubling has naturally prompted some investors to deem the token a bubble. JPMorgan said Monday’ that the token’s rally moves it “into more challenging territory,” and that a continued climb at its current pace would likely “prove unsustainable.”
The market very well may be “prone to a sort of correction,” but it’s unlikely to resemble that seen three years ago, Nguyen said. Institutional investors are poised to maintain their bitcoin positions for fear of prematurely selling and missing out on additional returns.
Growing interest in blockchain and cryptocurrencies also protects prices from returning to the recent lows, Borthwick said.
“What you’re talking about here is the adoption of something by everybody in the world over a very short period of time,” he said. “When you talk about a new technology, I don’t think there ever is such a thing as a top.“