First it was $6,000. Then $7,000. This morning, bitcoin crossed $8,000. After bottoming to $5848.26 towards the end of June, bitcoin is on an upward trajectory once more. In the last one month, the original cryptocurrency has risen by 33%. Within the last week itself, its price has risen by 20%. Does the current price increase portend the start of another rally for the cryptocurrency?
The Bull Case For A Bitcoin Rally
Proponents of bitcoin claim the price surge could be the start of a bull run, similar to the one that occurred in the latter half of last year when the cryptocurrency’s price rose to almost touch $20,000.
According to Brian Kelly, founder and CEO of BKLM LLC – a crypto-focused investment firm, big sellers have exited from the cryptocurrency ecosystem. “There were a lot of big sellers out there,” he told CNBC. He may have a point. The drawdown in bitcoin prices has been triggered by large sales by bitcoin whales, or investors with large tranches of bitcoin holdings. For example, a February dive in bitcoin prices has been ascribed to the sale of bitcoin stash by a former trustee of Mt. Gox, the Japan-based cryptocurrency exchange which crashed in 2013. (See also: Bitcoin Bloodbath: Price Nosedives; $53 Billion Wiped Off Marketcap).
Bitcoin’s dominance rate in cryptocurrency markets has also increased. The rate is a function of bitcoin’s trading share of the overall cryptocurrency markets. The more investors trade using bitcoin, the higher it is. For most of this year, traders have diversified their holdings into other cryptocurrencies, even during periods of price increases for bitcoin. The cryptocurrency’s dominance rate has moved back up in the last couple of weeks. This means that investors are again pouring money into cryptocurrencies.
News developments have also played an important role in propelling bitcoin into mainstream consciousness. For most of this year, however, they were unremittingly critical as prominent economists and government officials pointed out flaws and scandals engulfing the cryptocurrency ecosystem. Regulatory uncertainty only added to the confusing future outlook for cryptocurrencies. But the clouds seem to be clearing for cryptocurrencies. The SEC is poised to approve bitcoin ETFs soon, making the asset available to retail investors. Custody solutions introduced by leading exchanges could lead to a flood of capital from institutional investors.
Senior officials from the SEC and AFTC have also clarified the status of important cryptocurrencies, such as bitcoin and ethereum. (See also: SEC Chair Says Bitcoin Is Not A Security). An increasing number of countries and economic bodies are co-opting cryptocurrencies into their future plans. Perception plays a key role in determining the worth of an asset. Improved and positive news coverage could, once again, push bitcoin to highs.
The Bear Case For Bitcoin
To be sure, this is not the first time that bitcoin’s price has shot upwards this year. In three months out of the seven this year, bitcoin’s price has ended on a higher note than the previous month. But those periods of upswing were followed by troughs, during which the cryptocurrency’s price ploughed new lows.
According to Google Trends, interest in bitcoin is still lower than it was at the same time last year. And then there is the case for bitcoin’s nascent nature. It is still untested as an asset class. Its ecosystem is still being developed. A surge in prices last year led to a bottleneck of transactions on its network and caused several problems, such an increase in its transaction costs. Similar issues this year could put investors and government officials off the asset class for good.
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