While talking about the future of money, the mention of digital currency always comes up. The concept of “money” is a social construct, and society is slowly inclining towards this new digital form of payment, cryptocurrency. In the initial stages, economic analysts thought bitcoin was a short-lived blip that would die out soon. But looking at the current hike in prices and the impact it is causing on the economy, it has become important to stay informed about the cryptocurrency market, even if you are not looking to invest.
Bitcoin investors are strongly betting that this virtual currency is headed to reach $100,000 in value by the end of 2021. You can too now become a successful investor with
This prediction has drawn attention from skeptics, who look at cryptocurrency as a speculative asset rather than a store of value like gold. Last year it saw a growth of 160%, which was driven by strong institutional demand and limitation in the number of coins. Companies like Square and PayPal have introduced transactions in Bitcoin to make it available in front of a wider audience.
It had hit a breakthrough towards the end of 2020 when its price spiked to $20,000 after being stable for three years. It was introduced in 2011 at $0, and after the dreaded crash of 2018, analysts had written it off. However, when covid-19 had hit the world hard in 2020, it was one market that bounced back better and has made its place back on the map. Currently, it is soaring high with a price of $57,000. Analysts say that predicting the price to reach $100,000 in this year is not a stretch, as the world has already witnessed it go up to 10X, 20X, 30X in a year. The price can easily go up to 50X if the current demand curve continues.
Technical analysts have even gone a bit too far in citing that the price could hike as much as $318,000 by the end of 2022. Well, looking at the price curve, we can’t say it is completely impossible. What led to this speculation is its characteristic traits like limited supply, easy transfer across borders, and anonymous ownership.
Restrictions in supply
The production of Bitcoin is carried out through a process called “mining.” Highly efficient computers are put to work by ‘miners’ to validate blocks of transactions. Miners from different parts of the world compete to solve mathematical puzzles in return for rewards in Bitcoin. A bitcoin can be produced only at a gap of 10 minutes.
You might think there is an abundance of Bitcoins if they are produced at an interval of every 10 minutes, every day. But the supply is restricted. There can only be 21 million Bitcoins. After that, the production will be stopped. To make that possible, the mastermind behind the technology, Satoshi Nakamoto, had introduced the concept of “halving”, which takes place every four years. With every halving, the reward given to miners, which is a certain number of Bitcoins, will be reduced by 50%. After the halving in May 2020, miners are currently rewarded 6.25 BTC per block, which was 12.25 Bitcoins earlier. This process helps to curb inflation.
The third halving in May has reduced the rate at which new Bitcoins are produced. This restriction in supply has kick-started the renewed climb in price.
What accelerated growth is a company like Square’s Cash App and PayPal launching their crypto service. To have enough stock to supply their 300 million users, they have scooped up a lot of Bitcoins from the market. This has resulted in an unexpected Bitcoin shortage and has charged the price rally in the last few weeks.
Investment by big institutions
The whale index, which keeps a count of the bitcoin addresses or wallets holding 1,000 bitcoins or more, is at a high which has never been seen before. It was surprising to see more than 2,200 addresses belonged to bitcoin holders who are buying large amounts. This number has increased by 37% from 1,600 addresses in 2018. Institutional money has rushed in.
Some reputed investors like Stanley Druckenmiller, who is the founder of hedge fund Duquesne capital, and Rick Rieder, the chief investment officer of BlackRock INC, have recently shown their interest in Bitcoin.
Due to the instability in the economy during the pandemic, retail investors mostly remain sidelined. But with the platform provided by Square and PayPal, there is an increase expected in retail demand very shortly.
What makes Bitcoin so desirable?
- Bitcoin is a ‘store of value.’
Bitcoin is the first successful form of internet money. The characteristic traits of Bitcoin can be grouped as scarce, accessible, divisible, durable, and verifiable unencrypted. These are mandatory qualities that make it superior to traditional currency, and considering bitcoin as an asset; it is a great store of value. Once it gets accepted by a majority mass of people, it has the potential to rise to be a global reserve currency.
Looking at the history of money, you realise how any form of the money goes through three phases of evolution. First, it is considered as a collectible (as it is scarce), second, it is seen as an investment (as it is a store of value), and then it becomes money or a mode of payment. Bitcoin has shown a similar variation. It is currently in the early stage of the second phase.
- Bitcoin as a collectible
From the time it was introduced in 2009 till 2018, bitcoin was going through its “collectible” phase. People were speculative about their integrity. There was only a small group of cypherpunks who looked at Bitcoins as the “future of money.” In the initial stages, economists found it very difficult to figure out a valuation scheme for Bitcoin that would cater to its fundamentals. It was also a newbie, and people had doubts if it was the right time to agree to its “store of value” concept.
The idea was to introduce Bitcoin into the market as a basic utility. It doesn’t generate cash flow, so it becomes very difficult to forecast its price based on that. As it has a limited supply, the number of Bitcoin circulating in the market was easy to calculate, but the prediction of demand never matched, considering the volatile nature of speculative trading.
When the demand unexpectedly surged in 2017, particularly during the initial coin offering (ICO), the hike from $1,900 in early 2017 to $19,000 by the end of the year startled the investors. Unfortunately, the price went down to $3,700 by the end of 2018, but still maintaining a huge difference from what it was earlier.
The opponents of Bitcoin often target its volatility as a drawback, but it has worked in favour of it as a self-marketing feature. It’s unique, and it has helped Bitcoin to survive through the early days. Bitcoin is a decentralised blockchain network spread throughout the world. There is no coordinated marketing team working to promote its utility to the public. What made it stand tall and attract new users is only the dramatic price volatility it thrives on.
- Bitcoin as an investment
Bitcoin had a roadblock before graduating to the second phase as an investment option when people refused to identify it as “sound money.” There was a debate in 2017 concerning the scalability of bitcoin. There was an incident when the network got congested for some time due to high transaction volume, resulting in the cost for transactions surging unreasonably. This had stirred serious controversies, doubting the future of Bitcoin.
To combat this problem, on August 1, 2017, the blockchain was forked to introduce the Bitcoin Cash chain (BCH). This works as a second-layer solution creating larger blocks so that the size limit could be increased. On November 15, 2018, there was another change in the network introducing “Bitcoin Cash” and “Bitcoin Satoshi’s Vision.”
Bitcoin has survived a lot of roadblocks and fortunately has strived thereafter. The public disputes have also allowed Bitcoin to rise to its dominance and solidify its foundation.
This is the first time Bitcoin has made its way to mainstream media as a “digital gold.” Investors consider it a legit, credible, and easily liquefiable alternate asset that both individuals and institutions can invest in. As people are getting informed about its features, the conception of it being a speculative trading asset has successfully changed. It is now considered a long-term asset allocation option. This global network will continue to grow as more people keep recognizing its significance and benefits.
As long as the market continues to accept Bitcoin as a risk-friendly investment and large institutions keep investing money, the value of Bitcoin is expected to keep rising. The announcements of major businesses accepting Bitcoin payments definitely will fuel the future rise in prices.
However, we also need to consider the fact that traders looking out for profits will close their positions each time Bitcoin hits a new historical price, causing short-term weakness. This might be the right time for you to stay ahead of the curve and invest in Bitcoin as it is headed towards amusing profits.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.