Last week bitcoin reached an all-time high. This has put the year-to-date return at a sizzling 166%. The last time that bitcoin got to these levels was back in late 2017. At the time, the price hit nearly $20,000. But after this, there would be a grueling bear move.
Bitcoin is the pioneer of crypto currencies whose roots go back to the financial crisis of 2009. It was meant as an alternative to traditional money backed by the government.
A key to bitcoin is the underlying technology, which is called blockchain. This involves a global network of computers that operate software to allow for a public ledger. That is, the blockchain makes it possible to track transactions, making it difficult to manipulate the system.
Now in the early days, the reputation of bitcoin was mixed. Keep in mind that it was often used for criminal activities, such as drug dealing. But hey, isn’t this the case with regular currencies too?
Of course. And yes, bitcoin is used for many legitimate purposes as well. Note that it is becoming popular as a hedge against inflation. With the devastating impact of Covid-19, massive government spending and low interest rates, there are big concerns about traditional currencies.
“Today, investors have an enormous amount of cash sitting idle,” said Ed Nwokedi, who is the CEO at RedSwan CRE. “These investors are scared that local and global economies are printing too much currency to pay for our pandemic crisis. In a short time frame, inflation will eat into the value of their savings. Globally, investors are starting to sense similar areas of financial concern.”
So then, what now for bitcoin? What are the prospects?
This year has been pivotal for bitcoin as it has gotten much more validation. Consider that some of the world’s top investors – like Paul Tudor Jones and Stanley Druckenmiller – have been buying up this crypto currency.
But there has also been adoption from leading digital payments platforms. To this end, Square’s (NYSE:SQ) Cash App has made it very easy for anyone to make transactions in bitcoin. In the latest quarter, it processed about $1.63 billion in bitcoin revenue, up 11x on a year-over-year basis.
On the earnings call, CEO and co-founder Jack Dorsey noted that bitcoin will “be the native currency of the Internet and help people around the world better participate and thrive in the economy.”
PayPal (NASDAQ:PYPL) has also jumped into the bitcoin market. CEO Dan Schulman said, “I think that there’ll be more and more use cases for cryptocurrencies.” Since mid-November, PayPal has acquired up to 70% of newly created bitcoin.
Bottom Line on Bitcoin
The recent price action in bitcoin does look bubbly, though. “With such a dramatic rise in such a short period of time, I think we should not be shocked by a correction in the next few months,” said Anthony Denier, who is the CEO of Webull.
But it’s important to keep in mind that there is a fixed supply of bitcoin. Thus, as heavy sources of demand come in the market with PayPal, Square and billionaire investors, there could be a long-term bull run. And again, with continued uncertainty in the world, bitcoin will likely become a safe haven – similar to what gold has been.
This is the thesis of Druckenmiller. In a CNBC interview, he said: “Frankly, if the gold bet works the bitcoin bet will probably work better because it’s thinner, more illiquid and has a lot more beta to it.” He went on to say that bitcoin “has a lot of attraction as a store of value to both millennials and the new West Coast money and, as you know, they have a lot of it.”
So even though there may be a pullback – which seems reasonable right now– this could provide an opportunity for longer-term investors to get a better entry point.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.