In yet another leg up, Bitcoin recorded a brand new all-time high just shy of $35,000. While this may have seemed surprising a few weeks back, at this point, most are somewhat used to it. The cryptocurrency is charting consecutive highs daily, and it shows no signs of slowing down.
The spike may bring some 2017 flashbacks when Bitcoin was going up with no apparent limits, only to plummet nearly 70% the following year. And considering we’re already in a new year after a super bullish December of 2020, it’s normal for traders to be nervous.
However, this rally is justified and differentiated from the boom of 2017. Here we briefly evaluate 5 possible reasons for the current rally.
Big Players Are Joining In
After the fear generated by the market collapse during the COVID-19 pandemic, the sudden involvement of institutional investors gave Bitcoin a rush of credibility unlike ever before. It was no longer the magic internet money or some weird cash alternative used by the mafia.
Square, Paypal, MicroStrategy, GrayScale, SkyBridge… Every week a new institution announced a massive investment in Bitcoin. And this time, many declared their intention to hodl BTC as opposed to actually operating with it.
It’s inevitable that this flood of institutions reduces the total amount of Bitcoin available for trading, which causes such a shortage of supply that the almost parabolic price increase would be more than justified until markets find some equilibrium.
This is further fueled by the most recent Bitcoin halving that reduced the supply of freshly minted bitcoins to the market in half.
Bitcoin Moves in Cycles
Since its creation, Bitcoin has had an almost exact cyclical behavior of growth, drop, stability, and new highs. Changes are extremely volatile, with drops of 90% in a few months and rises of several orders of magnitude in the same period of time.
Bitcoin lived its last cycle with a bullish 2017, a bearish 2018, a stable 2019, and a bullish 2020 – still with a coronavirus.
The cycle seems to be marked by the influence of halving, a characteristic of Bitcoin that reduces its inflationary rate by half every 4 years. If we consider that there’s a stable interest in using Bitcoin (or better yet, a growing interest now that institutional investors are co-buying) and the halving of 2020 reduced the supply, the scarcity effect mentioned in the first point becomes even more valid.
The Weakening of the Dollar
The COVID crisis caused one of the worst crashes in the history of the stock market, and the crypto markets followed. To solve this problem, the Federal Reserve came up with a magic solution: they started printing money at a tremendous rate to save the economy.
The above chart perfectly highlights the massive decline in the purchasing power of the consumer dollar.
If many people criticized Bitcoin for being “Magic Internet Money,” closing our eyes to the fact that the government considers the dollar to be “Magic Physical Money” may be hypocritical.
In short, there are fewer and fewer Bitcoins available, but there are vast amounts of dollars in circulation. Let’s go back to point 1 and find a balance: you can only achieve equilibrium by paying more money for the same amount of BTC.
Bitcoin is Gaining Popularity
Large institutions don’t go to retail-oriented venues to buy their bitcoins, and we only find out about their movements when the SEC – or their CEOs – disclose them. That’s why OTC trades don’t directly influence the spot markets even though they move so much money.
However, the Bitcoin market is global, and the interest of new individuals in the crypto-verse is growing every day. One of the significant causes could be PayPal’s decision to allow transactions with cryptocurrencies, and one way to measure how much the public’s interest in Bitcoin is the number of searches for the term in Google Trends.
The above chart shows that the retail interest in Bitcoin is nowhere near that of the 2017 bull run. However, it’s also worth noting that the current searches for “bitcoin” have increased by 375% compared to this time last year. This shows that retail interest is steadily catching up.
Bitcoin is becoming a celebrity.
The Expectations Around an ETF.
While this point may have a hype effect in the short term, considering the institutional interest and the fact that the United States is on the verge of a new administration, it’s possible to see a snowball effect with it.
An ETF would allow people to trade Bitcoin without actually having it. Many believe that an ETF would be a perfect match for institutional investments on the road to mass adoption.
VanEck recently refiled its application for a Bitcoin ETF. Until now, the SEC had always denied the requests.
But now that Jay Clayton – the former head of the SEC – has resigned, and his successor has a more innovative vision, perhaps it’s the perfect time to apply.