One of the major investing themes coming out of 2020 is the soaring price of bitcoin (CCC:BTC). However, the cryptocurrency slid as much as 21% over a two-day period to as low as $32,389. Since the start of the novel coronavirus pandemic, it’s the biggest two-day drop, wiping off nearly $140 billion in total market capitalization.
In a nutshell, investors reacted to the stronger dollar and growing political uncertainty.
The cryptocurrency is still up roughly 89% on a trailing one-month basis. Nevertheless, the drop did send shivers down the spines of investors. Peaks and valleys will always be part and parcel of investing in bitcoin. But I believe this is just a momentary blip, and normal service will resume soon enough. Covid-19 is surging once again in Asia, and the impeachment of President Donald Trump is jolting the markets. The strengthening of the dollar and higher bond yields are also an important contributing factor in the fall in bitcoin prices.
However, all these factors are temporary in nature. In the long run, bitcoin will continue to climb higher. Financial institutions are increasingly allowing users to buy, store, and sell cryptocurrencies. That’s why in a recent Bloomberg Crypto monthly report, analysts are predicting that bitcoin could more than double from its current value in 2021.
Bitcoin Finally Gaining Widespread Acceptance
The recent surge in bitcoin prices is due to multiple factors. A weaker dollar, economic optimism, big-ticket investment banks backing the scarce digital currency against inflation, and a weakening U.S. dollar are some reasons. However, I believe the biggest contributor is higher institutional interest.
Square (NYSE:SQ), Paypal (NASDAQ:PYPL), Nvidia (NASDAQ:NVDA), and CME Group (NASDAQ:CME) all provide exposure to the cryptocurrency to their users. All of these companies are large diversified conglomerates. Therefore it’s hard to pinpoint how much money these companies are making through bitcoin. However, considering the surge in its price, it will be a significant contributor to the bottom line looking ahead.
Just as an example, Square’s Cash App generated $1.63 billion of bitcoin revenue and $32 million of bitcoin gross profit during the third quarter of 2020. This was up approximately 11x and 15x year-over-year, respectively.
Pantera Capital research shows PayPal and Square are securing all the new bitcoin added to the market daily. That’s great news, particularly for PayPal users. The online payments system provider allows its customers to buy, hold and sell cryptocurrencies such as bitcoin and ethereum for as little as $1.
Similarly, a range of mid- or high-end graphics cards from Advanced Micro Devices (NASDAQ:AMD) is selling out, leading to a shortage in the markets. It’s mainly due to cryptocurrency miners purchasing them in bulk to build machines to mine bitcoin and similar cryptocurrencies.
CME Group, which is the biggest largest financial derivatives exchange, also offers bitcoin futures contracts. Up until Dec 16, 2020, 8,560 CME Bitcoin futures contracts – equal to roughly 42,800 bitcoin – traded on average each day. Simultaneously, the institutional interest keeps increasing. The number of large open interest holders reached a record of 110 in December.
Here to Stay
We have been here before. Dizzying highs and lows are not a new phenomenon for bitcoin. However, the cryptocurrency is now finally gaining institutional support, which eluded it for a long time. The pandemic certainly helped. During the widespread lockdowns, online commerce and payments ballooned, increasing interest in digital currencies exponentially.
Bitcoin was always volatile. But the past year has shown that every asset class can become wobbly in an uncertain environment. It was always regarded as an interesting store of value due to the ultimate ceiling of 21 million and the difficulties in mining it. But its wider acceptance is bringing a sense of credibility and stability that was hitherto missing.
For me, that is what makes it an interesting asset to hold, despite the risks that come with it. The prospect of central banks issuing their own digital currencies will always be there. However, now that financial institutions as large as BlackRock (NYSE:BLK) are warming up to it, the future looks very bright for bitcoin.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
