The common perception of bitcoin has been of a volatile asset that is highly seasonal in nature. Many believe that it is an investment that is essentially broken and has virtually no future. Moreover, there is also the feeling that bitcoin would never be part of the major investment portfolios in the world.
All that seems to be changing as bitcoin’s price has shot up 288% this year.
This is the year of relative maturity for the cryptocurrency industry, with bitcoin at the center of this step-change.
The bitcoin craze had worn off until March this year when the currency started picking up again. Investors looking for safe-haven investments looked towards bitcoin as a store of value. Institutional investors are now investing heavily in the currency, and it’s a limited supply; its price has shot up past the $28,000 mark. Analysts estimate that it wouldn’t be slowing down anytime soon and will continue its stellar beyond 2021.
Why is Bitcoin Rising?
Bitcoin’s recent rise is startling and has a lot to do with the Covid 19-led market slowdown. Foremost, the money supply had grown by $2.5 trillion since the pandemic kicked in back in March. The coronavirus related stimulus bills have led to a colossal increase in the money supply and fears of higher inflation rates.
In hedging against these economic forces, investors are looking to invest in assets that appreciate and maintain their value. The most obvious route for them is investing in precious metals. However, though there are scarce, it’s virtually impossible to verify how it exists at this time. The great thing about bitcoin is that you can verify how much of it exists as every transaction is recorded in its public ledger.
Therefore, bitcoin is a better store of value than precious metals. The narrative is also catching on with many of the bigwigs of the investment world. Several public and private institutional investors are accumulating the cryptocurrency in their treasuries. Some of these companies include insurance giant MassMutual, Grayscale and others. Grayscale, in particular, holds over 500,000 bitcoin in its trust.
Bitcoin halving also has a direct impact on its price. It typically happens every four years, when the number of coins in circulation is reduced by 50%. Therefore, from around May, only 50% as much bitcoin were being created. Therefore, with the shortage in supply, the price increase was on the cards.
Bitcoin has been on fire this year, and in the past six months, has gained over 200%. With a strong foundation, limited supply, institutional investor interest, and the rising debt-to-GDP, the future for bitcoin is as bright as it gets.
It’s been a year of mainstream evolution for bitcoin and cryptocurrencies in general. They have made their way in corporate treasuries and institutional investor portfolios for the first time. Furthermore, the international payment network PayPal (NASDAQ:PYPL) greenlit cryptocurrency trading from their accounts.
Roughly 26 million merchants linked to the network have started accepting cryptocurrencies. Moreover, fintech giant Square (NYSE:SQ) is also holding part of its money in bitcoin. It is holding approximately 1% of its assets in bitcoin. The asset management company Fidelity Investments also announced that it was creating its first bitcoin mutual fund.
It will be interesting to see where bitcoin’s price ends up after next year. Analysts have varying predictions based on their respective pricing models. For instance, Bloomberg strategist Mike McGlone feels the price could potentially touch $170,000 for the next two years. Tom Fitzpatrick, a Citibank analyst, has an even higher estimate at $318,000 by next year. These estimates seem a little far-fetched at this point, but I feel that the price should at least touch $50,000 by the end of 2021.
The Bottom Line
Bitcoin has gathered a lot of steam this year and is finally becoming mainstream. Amid the Covid 19-led economic slowdown, bitcoin has become the go-to investment option in the market. Its 2017 debacle might never happen again with institutional investors’ involvement and support from significant payment gateways.
The next year’s price estimates are significantly higher than its current price, which means that it’s best to invest in bitcoin now before it gains further.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.