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Reuters / Lucas Jackson
- Bitcoin has more than doubled in less than a month, leaving analysts and investors puzzled and concerned about a possible market bubble.
- In many ways, the token rally over the past few months is fundamentally different from the surge seen three years ago, as buyers now range from casual day traders to fund managers managing billions of dollars in assets.
- Easy monetary conditions and billions of dollars in fiscal stimulus have led some investors to view the token as yet another hedge against inflation.
- Below are the factors that are driving bitcoin higher, and why experts don’t think cryptocurrency will collapse like it did in 2017.
- Visit the Business Insider homepage for more stories.
It took almost 11 years for bitcoin to hit $ 20,000 per coin for the first time in 2017. Just 22 days later, the world’s most popular cryptocurrency rose another $ 20,000, and its momentum continues so far.
Bitcoin’s rapid rise in 2017 was quickly followed by sales that wiped out most of its quickly earned gains. But no such trend has emerged this time around, and experts say a combination of factors fueled the token surge through 2020 and will continue to boost bitcoin into the New Year.
Below are three reasons for bitcoin’s price spike and a discussion of why it is unlikely to experience a crash similar to the one seen two years ago.
(1) Fear of missing out
As keen retail investors propelled the Bitcoin rally in 2017, state-owned companies sparked the token’s latest ascent. MicroStrategy set off a chain reaction by purchasing $ 425 million worth of bitcoin in August and September, Jimmy Nguyen, president of the Bitcoin Association, told Insider. This move opened the door for other state-owned companies to view bitcoin as a viable reserve asset.
Square followed in October with its own $ 50 million purchase. Yet it wasn’t until PayPal embraced bitcoin that prices started to soar. The company announced on October 21 that it would allow its hundreds of millions of users to buy, sell and hold bitcoin. The token surged to its highest level since July 2019, with investors seeing adoption as a key step for the widespread use of Bitcoin.
Read more: CIO of $ 500 Million Crypto Asset Manager Breaks Down 5 Ways to Valuate Bitcoin and Decide to Own It After Digital Asset First Crossed $ 40,000
“People see it moving as a reserve asset, knowing that there is a limited supply of Bitcoin, and saying, ‘okay, I want my share before it gets too expensive,” Nguyen said. .
The subsequent rise in bitcoin prices then pulled institutional investors into the fray. Fund managers who had previously hesitated over the token and its violent price swings feared they would miss out on good returns and started moving money into the cryptocurrency.
Institutional investors have since pushed billions of dollars into the cryptocurrency market. Their involvement played the biggest role in the token’s meteoric rise until the end of 2020, according to Douglas Borthwick, director of marketing for digital asset trading platform INX.
“If you don’t have something in your portfolio that is performing well then you are not going to perform well. People are going to leave your fund,” Borthwick told Insider. “You have bigger and bigger positions to hunt for a smaller and smaller number of bitcoin in circulation.”
(2) Request for inflation hedges
Bitcoin may at first seem completely out of touch with the coronavirus pandemic, but the fallout from the health crisis has played a critical role in supporting token prices. Governments around the world have passed billions of dollars in fiscal stimulus to tackle the economic damage from the pandemic.
The influx of fresh currencies and easy monetary conditions reinforced the case for bitcoin as a hedge against inflation, JPMorgan analyst Nikolaos Panigirtzoglou said in November. A limited supply of 21 million tokens and protection against political decisions saw the token serve as an alternative to gold and other hedge assets.
“This sense of currency has meant that everyone in the world has been looking for solid assets to invest in, something that is not increasing in terms of supply,” Borthwick said.
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(3) Increase legitimacy
Companies and institutional investors warming to bitcoin have given legitimacy to a recently known asset more for its obscure uses than for its investment potential. During the token’s rally in 2017, those less familiar with cryptocurrencies associated them with “nefarious activity,” Borthwick said.
The adoption of PayPal and the influx of institutional funds are giving bitcoin new legitimacy and interest among retail investors, Borthwick added. And just yesterday, the US Office of the Comptroller of the Currency said domestic banks can use blockchain networks and stablecoins for payments, further legitimizing digital currencies.
“The more the big names get involved in the space and the more regulators start to write regulations about it, the more of a mainstream asset it becomes,” Borthwick said.
The curiosity of ordinary investors exploded until the end of last year. Global search interest in Bitcoin more than tripled between early October and early January, according to data from Google Trends. Celebrities ranging from actress Maisie Williams at rapper Meek Mill tweeted about entering the cryptocurrency market. Within months, the crowd pushing money into bitcoin has gone from fund managers and crypto-fanatics to pretty much everyone, Borthwick said.
“There is an absolute land race to invest in the crypto space,” he added. “They are no longer friends and family and old friends from college.”
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What lies ahead for the burning cryptocurrency
Bitcoin’s rapid doubling naturally prompted some investors to view the token as a bubble. JPMorgan said on Monday that the token rally was transporting it “into more difficult territory” and that a continued climb at its current pace “would likely prove unsustainable.”
The market may very well be “prone to some kind of correction,” but it is unlikely to resemble the one seen three years ago, Nguyen said. Institutional investors are willing to maintain their bitcoin positions for fear of selling prematurely and missing out on additional returns.
Growing interest in blockchain and cryptocurrencies is also preventing prices from returning to recent lows, Borthwick said
“What you’re talking about here is the adoption of something by everyone in the world over a very short period of time,” he said. “When you talk about new technology, I don’t think there has ever been a top.”
Now read more market coverage from Markets Insider and Business Insider:
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