It’s safe to say bitcoin is red hot once again. Up 68% since Dec. 18, the cryptocurrency reached prices above $10,000 on Feb. 9 before pulling back to around $9,831 as of this writing.
The question is, what’s driving bitcoin’s strong performance as of late? With stock indices reaching new highs, why are investors bidding up this alternative asset?
There are many factors at play. JP Morgan’s Nikolaos Panigirtzoglou said last month that trading of bitcoin futures has increased in the past year. In other words, institutional investor demand is on the rise. With the last bitcoin boom largely retail-driven, this could mean big upside, as the “smart money” starts allocating significant capital to the crypto space.
In addition, this May’s bitcoin halving could be a driver of higher prices. While that’s up for debate (more below), you can’t count it out as a catalyst.
But that’s not all! As a favored investment class among young investors, prices could move higher. Especially if the stock market sees a correction. Let’s dive in and see what the verdict is for BTC prices going forward.
Institutional Demand and Halving Could Impact Bitcoin Prices
Despite its popularity, bitcoin remains largely a retail investor phenomenon. But, you can now trade BTC futures and options on the CME. The flagship cryptocurrency is becoming an institution-friendly asset class. While trading volumes remain small relative to retail bitcoin trading, institutional investment could pick up in the coming years.
With this catalyst up in the air, what else could send prices higher this year? How about the “bitcoin halving.” Occurring once every 210,000 blocks (or around four years), halving reduces the number of new bitcoins generated by mining. At first glance, this implies upside potential for BTC, as fewer coins are entering the market. But will this upcoming event translate into higher prices?
As InvestorPlace’s Matt McCall wrote last month, prior halvings produced booms in 2013 and 2017. The same could happen this year. Especially with this halving resulting in just 6.25 bitcoins rewarded per block.
Darrell Duffie is not so sure. The Dean Witter Distinguished Professor of Finance at Stanford Graduate School of Business recently sent an email to InvestorPlace, answering our question about his opinion on the May 2020 halving.
“In an efficient market for Bitcoin,” said Duffie, “the future impact of a predictable halving should already be reflected in today’s price. But the market is not actually very efficient.”
Duffie concluded by saying he is uncertain how the halving will impact price, citing how it could affect “both supply and demand.”
I think Duffie has a point with his uncertain answer. Prior booms were back when bitcoin was still gathering critical mass. While institutions are starting to dip their toe into cryptocurrency, we can’t be so sure prices will skyrocket thanks to this event.
Don’t Forget the Demographic Factor
In his latest bitcoin article, InvestorPlace’s Josh Enomoto touched on the popularity of bitcoin as an asset class among millenials. As he put it, “virtual currencies align with millennial values.” With 24/7 trading, bitcoin is a highly convenient asset class relative to stocks.
I partially agree with Enomoto’s point. But I don’t see my generation (and the rising Generation Z) putting all their eggs in the crypto basket. As seen from the rise of apps like Robinhood and Acorns, it’s more inexpensive than ever for young investors to put their money to work in equities.
A 10-year bull market doesn’t hurt either. While I recall full well the impact of the 2008 crash, those just a few years younger than me are less experienced with bear markets. This could be a positive factor for bitcoin prices.
If the markets take a dive, young investors (inexperienced with downturns) could look elsewhere to invest their money. If bitcoin prices move higher as stock prices move lower, Millennials and Generation Z could feel “FOMO” and start chasing gains in the crypto space.
Bottom Line: Many Factors at Play
There’s a myriad of reasons why bitcoin prices could head higher this year. With increased derivatives action on the CME, bitcoin’s interest among institutional investors is on the rise. This May’s halving could be the start of another boom (although that’s up for debate).
Finally, as Millennial and Gen Z-aged investors start having money to put to work, they may move more capital towards bitcoin. More so if the decade-long bull market screeches to a halt. With these factors in mind, bitcoin could be an opportunity, even as prices move higher.
That’s not to say go become a crypto fanatic. Cryptocurrencies are vulnerable to volatility. Yet, allocating a small position in bitcoin could be a smart move. With mainstream like stocks reaching record highs, it may be high time to diversify.
As of this writing, Thomas Niel is long bitcoin.