Bitcoin is picking up steam. Bitcoin highest price touched the $28000 bn mark this Sunday. A 275% plus year to date growth is more than enough for the curious to take the plunge. The market capitalization has expanded to over $500 bn. With this, the buzz surrounding the digital currency is back. Big institutional investors are rallying with their money to convert it into bitcoins. Let us find out what exactly is going on.
What brought about this all-time high in bitcoin price?
A tight inverse relation exists between Bitcoin and the US dollar. Bitcoin rises when the dollar falls. When the global markets and its underlying currency, USD goes down, people rush towards investing in other ‘safe-havens’ like bitcoin.
With US Federal Reserve hinting towards its Quantitative Easing plans to pump the economy, the value of the dollar will depreciate further. This would mean more inflation and less purchasing power with dollar bills. This makes good news for bitcoin hoarders. People rush towards bitcoin investment as a hedge against inflation.
In countries like Venezuela, to fight the excessive inflation, the government itself had to force people to own cryptocurrency to protect their purchasing power. Cryptocurrency cannot be printed. It can only be mined. Its value will not depreciate with federal bank policy decisions. The BTC supply is fixed at 21 million. With this limited source and the ever-increasing demand, the value of bitcoin is only expected to go up is what people think.
Should you be part of the bitcoin mad race too?
Bitcoins are not allowed to be used as a medium of exchange legally in many countries. With little mainstream usage and high price volatility, they are far from being an actual ‘safe-haven’ as they are called.
Bitcoin price history has been volatile. Since the birth of bitcoin in 2009, the digital currency has seen major ups and downs. The variations in bitcoin price 2009 to 2020 can be seen in the table below.
The volatility around bitcoin prices is hard to predict. Besides dollar value, there are many other factors at play that affect the bitcoin demand and price. A sudden surge in demand is seen when other investment options become unappealing or when there is some fear surrounding the federal currencies as was seen with demonetization in India. Sometimes the demand curve crashes exposing a bubble.
Bitcoin bubble: what exactly it is
When the perception of the actual asset is a lot more than its actual value, the asset is said to be a bubble ready to fizzle. For instance, back in 2008, a lot of people were putting their money in real estate. With the Lehman Brothers’ fall, a domino reaction was kicked off. The markets worldwide crashed. That was a real estate bubble.
With just a market capitalization of $46 bn, Lehman Brothers had the capacity to bring global markets on a roil. Imagine what would happen if bitcoin, known to have a market capitalization of $500 bn, fizzles out as a bubble.
As per financial analysts, the demand surge of 2020 is not a bubble ready to explode as this time, the investment is mostly by mature institutional investors. It is not the mad craze of 2017 amateur retail investors that pushed up prices way beyond the actual value. Also, unlike 2017, this year the price surge is due to an appetite for riskier assets following the federal bank’s stimulus package to ease the COVID impact. Some analysts go at length to predict that the BTC prices are expected to see a 10 times growth in the next 5 years.
All said and done, bitcoin remains a risky venture. If your risk appetite allows, turn on your safety belt and ride the roller-coaster.