Why does Bitcoin keep rising?
A breakdown of the reasons for the continued rise in the Bitcoin price
Since December 16, Bitcoin has risen about 195% within one year, to exceed $ 23,000, but what caused this skyrocketing rise? Views differ on the causes, but Bitcoin has grown from being a scam as many previously considered it to be something mature as a viable investment by popular billionaires, large corporations, and retail investors alike. Why are investors so optimistic about Bitcoin even after it breaks its all-time highs?
Main directions
Inflation and declining purchasing power amid massive stimulus spending are leading people to hoard valuable assets, including Bitcoin.
On the other hand, the mechanism for reducing rewards in Bitcoin mining is proving its scarcity and merit to be classified as an asset of value.
Institutional accreditation as an investment and a service that can be provided shows strong confidence in the future of bitcoin and cryptocurrencies.
The infrastructure associated with cryptocurrency and bitcoin has shown tremendous maturity in recent years, making investing easier and safer than ever before.
Inflation and the declining purchasing power of the dollar
Since the gold standard was abolished in 1971 by Richard Nixon, the amount of dollars in circulation has steadily increased. From 1975 until the emergence of the Corona virus directly, the total money supply increased from 273.4 billion dollars to more than 4 trillion dollars on March 9, 2020. Since that date, the total money supply has increased from 4 trillion dollars to more than 6.5 trillion dollars on 30 November 2020. This increase is mainly due to the stimulus packages related to the Coronavirus.
Currently, there are talks in Congress to pass another stimulus package worth nearly a trillion dollars, aimed at helping those affected by the Coronavirus. If the new stimulus package is approved, it means that since the emergence of the Coronavirus, about 50% of the total global supply of US dollars will be printed in 2020.
Sure, there are people suffering from job shortages and business closures, but an increase in the money supply has significant long-term effects on the purchasing power of the dollar.
The stimulus spending raised investors' fear of very high inflation rates - and they are right to do so - and to counter this inflation, investors sought to obtain assets that maintain or increase their value. Throughout 2020, the search for a valuable asset led them to Bitcoin. Why?
There are many assets that are a store of value. Perhaps the most popular assets that come to mind are precious metals such as gold or other things that have a limited supply. As for gold, we know that it is a scarce resource, but we cannot verify with certainty its quantity. Although it may seem far-fetched, gold is found outside Earth and could one day be obtained by prospecting for asteroids as technology advances.
Why does Bitcoin keep rising - What is the reason for the skyrocketing Bitcoin price - Reasons for the increase in the value of digital currencies - Cryptocurrencies
Why is this important to Bitcoin?
This is where Bitcoin distinguishes itself, as the final quantity of it will be written into the Bitcoin code. We can reliably verify how many there is now and how many will be in the future. This makes Bitcoin the only asset on the planet that we can demonstrate that it has a limited and steady supply.
In a phone call to Investopedia with Editor-in-Chief Caleb Silver, Michael Sonnenshin, a board member of the Grayscale Bitcoin Trust, said: “I suspect the amount of financial incentives that have been injected into the system following the Corona pandemic to stimulate the economy and move the markets prompted investors to think about what constitutes a store. Of value, what inflation might spare them and how they should protect their investment portfolios.
“It's important for investors to think about this,” Sonnenshen said in more detail. I think many of them are thinking of realistic approaches between digital currencies, such as Bitcoin, which have verifiable scarcity, and fiat currencies, such as the US dollar, which seems to be printed indefinitely. ”
Certainly, the reason for the high price of Bitcoin is mostly due to inflation concerns and a way to avoid it. On the horizon there appears to be more money printing through stimulus packages, as well as talk of waiving student loans from the Biden administration. It's fair to say that inflation will continue, which makes the case for hoarding valuable assets all the more convincing.
Halving (parity)
To further understand why Bitcoin has a limited, verifiable amount, it is important to understand its coding mechanism known as halving. Every time 210,000 blocks are mined, or roughly every four years, the profits given to miners for preparing Bitcoin deals are cut in half.
In other words, combined Bitcoin is a synthetic form of inflation because the Bitcoin reward awarded to the miner adds new Bitcoin to trading. This inflation rate is halved every four years and this continues until 21 million Bitcoins are released to the market. Currently, there are 18.5 million Bitcoins in circulation, or about 88.4% of the total Bitcoin on offer. Why is this important?
As discussed before, increasing inflation and the increasing amount of the US dollar devalued over time. As for gold, there is a fairly constant rate of new gold mined from the earth every year, which makes the rate of inflation relatively constant.
For Bitcoin, every cut in half increases the asset-to-flow ratio. Asset-to-flow ratio means assets currently available in circulation in the market in relation to newly influxed assets being added to
Trading every year. Since we know that every four years, the ratio of assets to flow, or current circulation, doubles in relation to the new supply, this metric can be plotted in the future.
Since the inception of Bitcoin, its price has been very close to its growing asset-to-flow ratio. Every halving saw the markets rally, shattering all-time highs.
The first half, which occurred in November 2012, increased from about $ 12 to nearly $ 1,150 within a year. The second halving took place in July 2016.
The price was around $ 650 in this half, and by December 17, 2017, the bitcoin price had risen to just under $ 20,000. Then the price fell over the course of a year from this peak to about $ 3,200, which is about 400% higher than its pre-halving price. The third halving of Bitcoin occurred on May 11, 2020, and its price has since increased by about 120%.
The reasons for the bitcoin price increase to the asset-to-flow ratio and the financial contraction may also be cited. If Bitcoin continues down this path as it has in the past, investors are looking to a significant price hike in the near and distant future. In theory, the price might rise to at least $ 100,000 sometime in 2021 based on the asset-to-flow model shown in the previous figure.
Some investment firms have set bitcoin price forecasts based on these fundamental models of analysis and scarcity. In a leaked analysis of CitiFX Technicals, Tom Fitzpatrick, general manager of the US Citi Bank group, said that the value of Bitcoin will rise to $ 318,000 sometime in 2021. Scott Minerd, chief investment officer at Guggenheim said. Guggenheim Global, in a live broadcast on Bloomberg, says that based on their "primary business" Bitcoin should be worth $ 400,000.
Institutional accreditation
As before, Bitcoin trading as a store of value increased dramatically in 2020, not only with retail investors, as a number of institutions, public and private, accumulated bitcoins instead of keeping the cash in their vaults.
New investors include Square, MicroStrateg, and more recently insurance giant MassMutual, and many more. In total, 938,098 Bitcoins have now been bought at the time of writing, worth $ 19,450,247,760 by the companies, most of which have been acquired this year. The largest acquisition was Grayscale's Bitcoin Trust, which now owns 546,544 Bitcoins.
Investments of this size indicate strong confidence among these institutional investors that the asset will be a good insurance against inflation as well as providing a strong price spike over time.
Aside from companies that are steadily buying Bitcoin, many companies are now starting to provide services to them. For example, PayPal has decided to allow access to encryption to more than 360 million active users. Fidelity Digital Assets, launched in October 2018, has offered guarding services for cryptocurrencies for some time, but now allows customers to pledge bitcoin as a security in the transaction.
CBOE and CME plan to launch cryptocurrency products next year. The number of banks, middlemen, dealers, and other institutions looking to add such products is very many, but in the same way that a company should trust an investment, you must also trust that the products it sells have value.
Central banks and governments around the world are also now studying the potential of a central bank digital currency (CBDC). While these are not cryptocurrencies because they are not decentralized, and the primary control over supply and rules is in the hands of banks or governments, they still demonstrate the government's recognition of the need for a more advanced payment system than paper money provides. This also lends an advantage to the concept of cryptocurrencies and their overall convenience.
Merit
Bitcoin has come a long way since its launch in 2009, from its initial use as a way to buy drugs online to becoming a new cash medium that provides demonstrable scarcity, absolute transparency with an immutable book of accounts. Even after realizing that Bitcoin and its blockchain technology could be used for more than just the Silk Road, it was nearly difficult for the average person to participate in previous years when wallets, keys, exchanges, and platforms were confusing and complicated.
Today, access is easier than ever. Licensed, regulated exchanges that are easy to use are abundant in the United States, and deposit services from old financial institutions that people are accustomed to are available to the less technically experienced. Derivative instruments and blockchain ETFs allow those interested in investing but fearful of volatility to participate in them. The number of places where Bitcoin and other cryptocurrencies are accepted is increasing with the rapidly increasing payment.
On Investopedia's podcast, Grayscale's Sunnachine said: “The market is much more sophisticated today than we were at the time (peak 2017). We have seen with our own eyes the evolution of derivative sukuk options for the two-way market, and the lending and borrowing of the contract markets. Futures. It's just a two-way market that's more active 24 hours a day which is starting to operate more mature with each passing day. ”
Besides all this, the confidence that major institutional traders have shown, by offering them crypto-related products as well as blatantly investing in Bitcoin, speaks volumes. 99bitcoin is the site that counts the number of times an article announced the end of the Bitcoin era, now counts 386 Bitcoin deaths, and its last death was on November 18, 2020, and the oldest death on October 15, 2010. With Bitcoin's breakthrough the most intense
At all previous levels and having more infrastructure and institutional investment than ever before, it seems that they are here to stay.
Translation: Yahya Suleiman
Checking: Mazen Al-Nafouri
Review: Razan Hamida
