In 2020, Bitcoin started the year at $7,179.96 and reached $19,382.36 in just 11 months. That’s an impressive 270% jump in value for its fans. If you are an investor who had betted on the popular crypto, that would have represented a record growth of your portfolio value.
But despite this phenomenal uptrend, some governments have still banned their citizens from investing in Bitcoins. And some have issued warnings, while globally, it remains largely unregulated. Even then, the demand has shown no signs of winding down either.
So, what’s driving this Bitcoin growth?
There are several reasons for this extraordinary growth that has made Bitcoin a hot topic in 2020. While some are market driven, others are inherent to its very nature.
Bitcoin halving
Bitcoin enters circulation every time its miners are rewarded with the crypto for validating Bitcoin transactions, a process that’s commonly called “mining”. However, the Bitcoin reward given to miners is halved every 210,000 blocks of transactions mined. And this usually happens every four years.
And what’s the impact? It results in halving the rate Bitcoins are released to the market. This process serves to control the cryptocurrency’s inflation rate with artificial mechanisms. And when supply slows down relative to demand, basic market economics suggest that the price will surge.
This is exactly what was predicted leading up to the Bitcoin halving event that was scheduled for May 11 in 2020. So, the rise in price in the latter half of the year can be explained partially by this.
Volatile financial markets
When the markets become highly volatile, both individuals and institutions resort to more stable investment options that could act as a hedge against market risks. The pandemic-led events that resulted in volatile stock markets and depreciating currencies have all contributed to such demand for Bitcoin.
Nigeria is a good example. Today, it’s one of the fastest-growing markets for Bitcoins. But what’s driving more and more Nigerians to invest their hard-earned money in a virtual currency? One of the major reasons for this trend is the depreciating naira, their local currency.
And institutions display a similar line of thinking as they look for new ways to protect their cash holdings from depreciation. This is why big corporations are now leading the way for a new wave of institutional investments in Bitcoin. The listed giant Microstrategy Inc., for example, invested $425 million in the crypto during August and September in 2020, making it their primary reserve asset.
The herd mentality
Between the last two halvings in 2016 and 2020, the Bitcoin’s value has appreciated from $664.44 to $8,786.66. That’s a 1322% jump within just four years. So, anyone who had invested $10,000 in Bitcoin on May 11, 2016, would be effortlessly sitting on over $132,200 by May 11, 2020. And within the six months that followed the 2020 halving, that investment would have surged in value to reach more than $231,000.
When a few Bitcoin fans are seen reaping massive dividends such as this, it’s natural for others to follow in haste to profit from this seemingly extraordinary crypto gold mine. And as new investors scramble to purchase more Bitcoins, increased demand will cause its price to surge.
So, are we seeing a Bitcoin bubble?
Bitcoin doesn’t respond to market conditions in the same way most asset classes would. But it has still shown a high level of volatility during the past 11 years it has been in existence. And the fears of a bubble mostly stem from what the world encountered following 2017.
The crypto price saw a steep rise to reach nearly $20,000 in the latter part of 2017. But this was quickly followed by a similarly steep descent. The Bitcoin value halved just one month later and went past the $4,000 mark in 12 months.
The 2017 bubble was attributed to a retail buying frenzy. However, some suggest that it was a manipulated spike by a single Bitcoin holder. But Bitcoin is a decentralized currency with little regulation. So, its manipulation did not trigger the same level of official investigations as would have a stock market manipulation. This meant there was little consolation for those who lost out when the bubble burst.
So, the thought of another bubble is enough to send chills down the spine of most people. But many experts believe that this new uptrend might not lead to another dramatic burst. Demand led by institutional buyers instead of retail buyers and greater government focus on bringing in controls and regulatory measures are some of the reasons given.
“There are a lot of differences to what was happening before. The price has steadily increased, we are seeing very little retail participation and markets are much more liquid and much more accessible to institutional participants,” told The Block’s Larry Cermak to Reuters.
“Unlike 2017, however, the asset now boasts a functioning derivatives market and custody services by established financial institutions,” writes Tom Wilson and Anna Irrera.
Then why are governments and investors still edgy?
Despite the increasing confidence levels among some institutional investors and governments, many others are still hesitant. The skeptics insist that it’s highly risky.
There are several reasons why the bitcoin bears high risk as an investment. To begin with, it has only been in circulation since 2009. That makes it fairly young, by any standards. What started trading at well under 10 cents has grown in value to hit the $20,000 mark in just 9 years. Now that’s a growth story that could make anyone a tad jittery.
And by nature, it’s a decentralized currency. This means there are no central storage mechanisms, administrators, or authority. Anyone can become a miner, create a bitcoin address (the equivalent of a bank account for fiat), and freely transact without any screenings or approvals. So, Bitcoin is hard to regulate. At best, governments can issue guidance and enforce their authority on how it’s purchased, sold, used, and treated. For example, it’s treated as a taxable asset by the IRA in the US.
And as with everything else, it has its security flaws too. This means there are many creative ways to steal Bitcoins. And it has also become a source of funding for various darknet activities such as hacking, child pornography, and drug trafficking. And an estimated 1% of Bitcoin in circulation is flowing into money laundering activities. So, it’s keeping law enforcement agencies on their toes, just like fiat currencies.
But what are believers saying?
Regardless of its flaws, Bitcoin has drawn a large following in recent times. And some earlier skeptics have become more welcoming than others.
So, you can now make your purchases using the popular crypto in various parts of the world, from Tokyo to New York. Globally, more than 15,000 businesses are accepting it for payments, including big names like Home Depot and Microsoft. There are also over 5,000 Bitcoin ATMs.
Some governments even have plans underway to introduce their own digital currency to replace the popular crypto. China, for example, has already launched pilot runs of its DCEP, which stands for Digital Currency Electronic Payment. And countries like Thailand, Brazil, and the US will likely follow suit.
And the tech giant Facebook has also been eyeing its in-house digital currency with the Diem, formerly known as Libra, drawing much attention from the industry. Even financial services giants such as JP Morgan Chase and Goldman Sachs want to launch their own digital assets.
A digital currency and a high-growth asset
But why all this interest? The Bitcoin is not just an alternative currency for payments. It’s serving as a high-growth asset with inflation-protection for investors. This makes the very idea of it lucrative to many parties. And some are predicting that it may even replace gold as a safe haven investment.
Bitcoin is also playing an important role in global trade, making it even more influential. For example, it’s helping Nigerian import businesses to bypass the limitations in the local banking systems and the lack of access to US Dollars.
And many governments are now making the effort to introduce regulations. The European Commission has already proposed a legal framework for its transition into a regulated financial instrument. Earlier in 2020, the US also brought a Crypto-Currency Act to congress, which was met with mixed sentiments.
Undoubtedly, there’s much to be done in the regulatory space and much to be learned about the Bitcoin’s hazards and potential. But despite all that, one thing is for sure. Even the skeptics are now keeping a close eye on it.
