Reuters / Lucas Jackson
- Bitcoin more than doubled in less than a month, leaving analysts and investors perplexed and concerned about a possible market bubble.
- In many ways, the increase in the token in recent months is crucially different from the increase seen three years ago, as buyers now range from casual day traders to fund managers who handle billions of dollars in assets.
- Easy monetary conditions and trillions of dollars in fiscal stimulus have led some investors to see the token as a new protection against inflation.
- Below are detailed the factors that drive bitcoin and why experts don’t believe the cryptocurrency will crash as it did in 2017.
- Visit the Business Insider home page for more stories.
It took nearly 11 years for bitcoin to reach $ 20,000 per currency for the first time in 2017. Just 22 days later, the world’s most popular cryptocurrency has soared another $ 20,000 and its momentum has so far remained strong.
The rapid escalation of Bitcoin in 2017 was quickly followed by settlements that erased most of its quickly earned earnings. But that trend did not emerge this time, and experts say that a combination of factors fueled the increase in the token until 2020 and will continue to boost bitcoin in the new year.
The following are detailed three reasons behind the rise in the price of bitcoin and a discussion of why it is unlikely to crash similar to the one observed two years ago.
(1) Fear of losing
While passionate retail investors boosted the bitcoin rally in 2017, public companies have started the latest token escalation. MicroStrategy started a chain reaction by buying $ 425 million 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 started to skyrocket. The company announced on October 21 that it would allow hundreds of millions of users to buy, sell and store bitcoins. The token jumped to its highest level since July 2019, when investors saw adoption as an important step towards widespread use of bitcoin.
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“People are seeing a shift to this as a reserve asset, knowing that there is a limited supply of Bitcoin and saying, ‘Okay, I want my share before the price goes up too much,” said Nguyen.
The subsequent rise in bitcoin prices pulled institutional investors into the fray. Fund managers who previously refused the token and its violent price swings feared they were losing good returns and started to transfer some money to the cryptocurrency.
Since then, institutional investors have pushed billions of dollars into the cryptocurrency market. Their involvement played the biggest role in the meteoric rise of the token until the end of 2020, according to Douglas Borthwick, director of marketing for the digital asset trading platform INX.
“If you don’t have something in your portfolio that performs well, then you won’t perform well. People are going to leave their fund, ”Borthwick told Insider. “You have bigger and bigger positions, chasing less and less bitcoin in circulation.”
(2) Demand for inflation hedges
Bitcoin may at first seem completely disconnected from the coronavirus pandemic, but the consequences of the health crisis have played a critical role in supporting token prices. Governments around the world have spent several trillion dollars in fiscal stimulus to deal with the economic damage of the pandemic.
The influx of new currencies and easy monetary conditions boosted the bitcoin case as a hedge against inflation, JPMorgan analyst Nikolaos Panigirtzoglou said in November. A limited supply of 21 million tokens and isolation from policy decisions saw the token serve as an alternative to gold and other hedge assets.
“This impression of money means that everyone in the world is looking for real assets to invest, something that is not increasing in terms of supply,” said Borthwick.
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(3) Increase legitimacy
Companies and institutional investors cheering up with bitcoin gave legitimacy to a recently known asset more for its obscure uses than for its investment potential. During the 2017 token rally, those less familiar with cryptocurrencies associated them with “nefarious activities,” said Borthwick.
The adoption of PayPal and the influx of institutional funds lend bitcoin a new legitimacy and interest among retail investors, added Borthwick. And just yesterday, the United States Currency Controlling Office 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 common asset,” said Borthwick.
Curiosity among ordinary investors exploded at the end of last year. Global search interest in bitcoin has more than tripled from early October to early January, according to data from Google Trends. Celebrities since actress Maisie Williams for rapper Meek Mill tweeted about how to enter the cryptocurrency market. In a matter of months, the crowd that injects money into bitcoin has evolved from fund managers and crypto-fanatics to virtually everyone else, said Borthwick.
“There is a race for absolute land to invest in cryptographic space,” he added. “They are no longer friends and family and old friends from college.”
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What’s to come for red-hot cryptocurrency
The rapid doubling of Bitcoin naturally led some investors to consider the token a bubble. JPMorgan said on Monday that the token’s rise takes him “into more challenging territory” and that a continued rise in the current pace is likely “to prove unsustainable”.
The market may well be “subject to a kind of correction”, but it is unlikely to look like the one seen three years ago, said Nguyen. Institutional investors are ready to maintain their bitcoin positions for fear of selling prematurely and losing additional returns.
Growing interest in blockchain and cryptocurrencies also protects prices from returning to recent lows, said Borthwick
“What you are talking about here is the adoption of something by everyone in the world in a very short period of time,” he said. “When you talk about new technology, I don’t think there will ever be a top.”
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