In the past decade or so, Bitcoin (CCC:BTC) has evolved from a fad to a major institutional commodity. It has fluctuated wildly in that period but now appears to have matured significantly. The pandemic-induced tail-winds have re-invigorated the crypto-craze, but one which is different from yesteryears. With greater institutional investor interest, limited supply, and acceptance from financial institutions, Bitcoin should soon breeze past the six-figure mark.
Many would consider 2020 to be a turning point for Bitcoin and the crypto-world in general. The pandemic has led to an increasing acceptance of Bitcoin as a form of “quasi-digital gold” for investors. Economic historian Niall Ferguson recently commented about how pandemics have been significant catalysts for financial innovation. Moreover, he states that Bitcoins “built-in scarcity in a virtual world characterized by boundless abundance” continue to increase its popularity. Hence, Bitcoin has been getting mainstream attention for the first time and is slowly becoming normalized by various economic institutions. Let’s dive a little deeper into why I feel that Bitcoin will continue to roar ahead for the foreseeable future.
Supply Constraints and Rising Demand
One of the key aspects of Bitcoin is that it has a limited supply. Bitcoins’ total supply is at 21 million, and 18.5 million of them have been mined already. Bitcoin mining is a process that creates new Bitcoins, and miners currently get 6.25 BTC per block. However, every four years, these rewards are halved, and therefore by 2024, it will drop to 3.125 BTC per block. The last ‘halving’ took place in May 2020.
For miners, the issue is about supply constraints and that the process continues to get more challenging over time. Massive amounts of energy are used to mine Bitcoin coupled with costly equipment that needs to be continually upgraded. A 2019 study showed that roughly 0.2% of the world’s energy is consumed to mine BTC. That number is likely to have risen considerably since then.
On top of that, demand keeps increasing for the currency, and the pandemic has taken things up a notch or two. The regulatory and infrastructure developments have sparked mainstream investor interest. Hedge funds, pension funds, insurance companies, and payment platforms are scooping up a sizable number of Bitcoins every day. Hence, in such a situation, Bitcoin still has ample runway to cruise into the six-figure territory.
Will History Repeat Itself?
Bitcoin’s recent price correction has investors worried about whether it’s 2019 all over again. The currency went on a tear beginning in mid-2017 crossing $14,000 before losing more than 75% of its value by early 2019. However, things are mighty different this time around as the currency has come of age in these unprecedented times. The recent price correction has investors biting their nails, but these fears appear to be overly exaggerated.
Contrary to its skeptics, Bitcoin is not a bubble but a digital asset that will pay its investors for years to come. More than 30% of institutional investors in the US and Europe own cryptographic assets. With the growing awareness about cryptocurrencies, I expect them to form a significant percentage of investors’ total reserves assets.
Additionally, the development of new layers will enable the use of blockchain technologies in financial markets. An example of this is decentralized finance, which uses blockchain technologies to automate financial and digital markets.
Bottomline on Bitcoin
Fears of a Bitcoin bubble are a thing of the past. The currency and the crypto-world, in general, had witnessed a step-change in 2020. In particular, Bitcoin has now matured, and its demand continues to rise amongst the who’s who of the investing world. I expect BTC to cross six figures within the next couple of years. If anything, the recent correction presents an excellent buying opportunity.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article