At the beginning of 2020, the prospects for Bitcoin (BTCUSD), and by extension cryptocurrency markets, did not look too bright. Both were fitfully attempting to shake off a prolonged price slump and a rise in crypto crime. Market liquidity remained low, and institutional investors were still shying away from cryptocurrencies.
Then the pandemic happened. Multiple rounds of unchecked stimulus spending by central banks shook Bitcoin from its price stupor and strengthened its economic proposition as a store of value. Its price coasted past the $20,000 record, set nearly three years ago during a booming economy, in early December and has skyrocketed by more than 200% since the beginning of this year.
Meanwhile, cryptocurrency markets have jumped to $760 billion, a hair's breadth away from their $800 billion valuations in 2017, moving up significantly up from their $185 billion market cap at the start of this year.
- Bitcoin and cryptocurrency prices skyrocketed to new highs in 2020 as fears of macroeconomic instability drove investors toward new asset classes.
- Bitcoin was a major beneficiary as institutional investors and banks announced investments into the cryptocurrency and its trading ecosystem.
- However, the crypto ecosystem is still plagued by several problems, such as scams and low liquidity.
What Caused the Increase in Bitcoin Price?
Several developments created a perfect storm for Bitcoin and crypto markets to thrive during the second half of this year.
Chief among them was (and continues to be) central bank policy during the pandemic shutdown. Analysts have cited macroeconomic instability resulting from unchecked stimulus during the economic shutdown and low interest rates as major reasons for investors to put their money into Bitcoin. The cryptocurrency's scarcity contrasts with the flurry of spending by central banks around the world. This monetary policy tactic could debase the value of fiat currencies and lead to rampant inflation.
Institutional investors adopted a risk-on profile amid an economic environment marked by low-interest rates and fear of macroeconomic turbulence. In their search for investable assets, investors re-evaluated their original assessments of Bitcoin and bolstered its trading infrastructure.
Unlike Bitcoin's 2017 price rise, when the chorus was mostly negative, the accompaniment this time around has been positive. The upshot is that some institutional investors are now betting on Bitcoin. They were not the only ones. Publicly listed companies like Square, Inc. (SQ) and MicroStrategy Incorporated (MSTR) also invested in Bitcoin, the latter company making it a prominent part of its treasury management strategy.
This year also marked a seminal event in Bitcoin's young history. Another Bitcoin halving slowed the rate at which Bitcoin is produced, thereby reducing the cryptocurrency's overall supply in the market. Generally, the event is accompanied by a price bump. But it is a measure of this strange year that the event, which was supposed to have witnessed record inflows, barely produced a blip in crypto markets. Still, the supply reduction helped set up the circumstances for Bitcoin's later price leap.
Will This Time Be Different?
As much as things have changed from 2017, they also remain the same. Bitcoin price is still irascibly volatile. In the past week alone, the cryptocurrency has added roughly $100 billion to its overall market cap while whizzing past $29,000.
That volatility is fertile ground for criminals and scammers. Hackers and fraudsters had made off with funds totaling $1.8 billion by October from cryptocurrency markets and ecosystems. Ripple's XRP (XRPUSD), the third biggest cryptocurrency by market capitalization, is also being sued by the Securities and Exchange Commission (SEC) for an unlawful sale of securities.
Though a lesser issue today while using larger exchanges, a liquidity problem remains. Price disparity between crypto exchanges continues to exist. Even as they have shed their inhibitions about Bitcoin and cryptocurrencies, institutional investors are still wary of committing fully. Record inflows into the Grayscale Bitcoin Investment Trust (GBTC) are proof. The trust offers indirect exposure to Bitcoin for investors, saving them the hassle and cost of owning Bitcoin. In turn, they become crypto tourists, able to crest a rising trade and exit it when price falls.
After multiple attempts at a Bitcoin exchange-traded fund (ETF), San Francisco-based Bitwise Asset Management also jumped ship this year to launch a crypto index fund. While the proliferation of such investment vehicles offers institutional investors the chance to profit from Bitcoin and crypto, the seasonality of investments directed at them ensures that crypto's liquidity problem will persist.