Bitcoin Is Back and Booming. Will the Rally Last?
Low interest rates on safer investments like bonds have some investors taking a chance on cryptocurrency.
|Audrey Fahlberg||Dec 9, 2020|| 23||84|
For the few years immediately following its inception in 2009, Bitcoin traded at pennies on the dollar. But last Monday, more than a decade into the cryptocurrency’s existence, Bitcoin investors hit the jackpot. According to data provider CoinDesk, the price of a single Bitcoin hit $19,850 for the first time ever, breaking its previous record of $19,783 in December 2017.
Market analysts are quick to remind investors that Bitcoin remains a risky asset. After all, the cryptocurrency king’s record-setting week was the culmination of a sharp seven-month long increase since its March low, when it plunged below $6,000 following the stock market’s pandemic-induced crash. But as demand continues to increase and blockchain technology edges toward the mainstream, investors are becoming more and more optimistic that Bitcoin’s volatility is only temporary, and that the cryptocurrency will reap big returns in the long run.
What accounts for last week’s rally? Some say the surge was simply a product of November’s gangbuster month for the stock market, driven by good news on the vaccine front and investors’ ongoing anticipation of a swift economic recovery. Over the past few months, the Federal Reserve’s low interest rates have deterred people from putting their assets into safer bets like government bonds. Investors have instead flocked to more speculative alternatives like Bitcoin, hoping to reap big gains while the market is hot.
Market analysts attribute Bitcoin’s 2017 peak to a surge in individual traders who caught the cryptocurrency fever and capitalized on Bitcoin to “get rich quick.” Highly accessible platforms like Robinhood, PayPal and Square’s Cash App have recently fed into this day trading frenzy by facilitating Bitcoin trades and allowing inexperienced investors to dip their toes in the crypto market.
Luke Lloyd, a wealth adviser and investment strategist at Strategic Wealth Partners, says that institutional participation has also been a game changer for the cryptocurrency market this year, as more and more professional investors have begun betting on Bitcoin’s long-term value. Square, a financial service owned by Twitter CEO Jack Dorsey, bought $50 million worth of Bitcoin in October. “Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose,” the company wrote in a statement.
Even though Bitcoin remains a speculative investment, Lloyd said that last week’s rally “doesn’t feel as euphoric as it did three years ago,” given that more and more investors appear to be holding onto cryptocurrency for the long term. Many retail investors now operate under the assumption that even fractional shares of Bitcoin could become a goldmine in just a few years’ time.
Bitcoin is still a relatively young product. It was launched in January 2009 by pseudonymous creator Satoshi Nakamoto, who developed the cryptocurrency as a hedge against inflation. Its decentralized structure immediately attracted libertarian types in search of cash alternative assets and eager to build their investment portfolios without government oversight.
Unlike paper currencies, Bitcoin is powered by blockchain technology, a decentralized digital database that tracks the whereabouts of every single coin in circulation. New transactions create new blocks of data that are linked together in a chain-like sequence. The interconnectedness of each block in the financial ledger means that all transactions are added in chronological order and are therefore irreversible.
There is no central authority that regulates Bitcoin. Instead, thousands of computers around the world called “nodes” verify transactions in a collective network, preventing any singular actor from falsifying data or counterfeiting coins. The process is transparent, efficient, and doesn’t require a middleman for account transfers.
Bitcoin’s value is also contingent on its finite supply. Unlike central banks, which can print new money at will, Bitcoin’s entire operating philosophy revolves around scarcity: Only 21 million bitcoins will ever be created. This means that much like gold, precious metals, and other scarce commodities, Bitcoin can act as a hedge against inflation.
Roughly 18.6 million bitcoins are currently in circulation. Once 21 million bitcoins have been mined, the cryptocurrency will meet its supply cap and its price will likely surge. “The more people that buy and hold Bitcoin, the lower the supply that is out there that is tradeable which inherently increases the price,” Lloyd explained.
At a roughly $362 billion valuation, Bitcoin accounts for over two-thirds of the total market value of all cryptocurrencies. According to James Barth, a professor of finance at Auburn University’s Harbert College of Business, there are roughly 5,000 other cryptocurrencies in existence. The most popular alt-coins—Ethereum, Litecoin, Bitcoin Cash, and Ripple—typically track Bitcoin’s market patterns, shooting up when Bitcoin surges and vice versa. But Bitcoin is still the biggest fish in the pond, and its name recognition means it will almost certainly continue to drown out competitors going forward.
“I don’t think any of the alt-coins are going to gain as much traction ever as Bitcoin, but that doesn’t mean there’s not money to be made in them,” Lloyd said. Market analysts are optimistic that Bitcoin and downstream competitors will keep up the momentum next year. “I am looking for $50,000 by the end of 2021 and I think $100,000 is in the question for a year end 2021 target,” Lloyd said.
That said, the federal government is keeping a close eye on the cryptocurrency market. In October, the Justice Department published a report highlighting blockchain technology’s role in propping up illicit drug markets and dark web money laundering schemes. The attorney general’s Cyber Digital Task Force concluded that “despite its relatively brief existence, this technology already plays a role in many of the most significant criminal and national security threats our nation faces.”
“I think the regulatory concern that some governments have obviously is whether, say, Bitcoin or [other] cryptocurrencies will become a substitute for cash,” Barth said. This would make it more difficult for the Federal Reserve to implement monetary policy.
Still, many countries are openly embracing blockchain’s technology. China, Sweden, and Singapore, for example, have all flirted with the idea of launching digital currencies as an alternative for making payments.
Over the next few years, the cryptocurrency market is all but guaranteed to whipsaw between record highs and disappointing lows. Bitcoin, for example, has already lost some steam since last Monday’s peak, hovering around $18,250 as of this writing. Despite its volatility, however, investors remain optimistic that blockchain technology will soon revolutionize our understanding of the global economy and help create a world in which governments no longer retain a monopoly on currency.