In recent weeks Bitcoin's price has seemed to continue marching higher. But what is driving this growth? It turns out there are a wide variety of factors that continue to make Bitcoin rise in value.
- Bitcoin broke a key resistance level making investors believe there is further upside.
- Rising inflation and the potential for even more stimulus continues to push people to safe-haven assets.
- Increased adoption from payment applications like PayPal will give far more people easy access to cryptocurrency.
- Publicly traded companies purchasing Bitcoin shows a high level of confidence in its appreciation.
- Bitcoin's historical trend of closely following its halving stock-to-flow model shows an ambitious and extremely bullish outlook.
Bitcoin has seen extremely volatile peaks and troughs in its time. Its last peak was near $14,000 in June of 2019. At this point, Bitcoin experienced a hard resistance and it failed to push through this stage.
If Bitcoin were to break through that resistance in June it would have likely triggered a bull market. Unfortunately, for Bitcoin bulls, it failed to do so and cascaded down to a low point of nearly $3,800.
In October, Bitcoin retested this resistance point only to fall back down. On November 4th, Bitcoin pushed straight through $14,000 and continued higher. This is significant because Bitcoin's next resistance point is its previous all-time high of $20,000.
With Bitcoin no longer having a theoretical resistance point until its previous all-time high of $20,000, many investors have become bullish that the cryptocurrency will be able to retest that price point or even push past it. This speculation has lead to an increase in Bitcoin's value.
Inflation and the Rush Toward Safe-Haven Assets
Another reason for Bitcoin's rise is the growing inflation of the U.S. dollar. While inflation is on average 2% each year, recent stimulus spending is poised to greatly increase the level of inflation and decrease the dollar's purchasing power.
With the recent stimulus packages, the United States has added around $2.4 trillion to the economy. This has many worrying about the inevitable decrease in the dollar's purchasing power and the rise in inflation.
To hedge against this rising inflation, many have retreated from the dollar and have taken shelter in assets that historically have held value or have even appreciated in value. Typically, assets that people convert their dollars into to avoid inflation or volatile markets are ones that are scarce or are less volatile in general. These 'safe-haven' assets include things like precious metals, stocks in sectors that are generally less volatile, and more recently, Bitcoin.
Adoption as a Means of Payment
Another reason for Bitcoin's price appreciation is its growing adoption as a payment method. Recently, PayPal (PYPL) announced that it would soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as a form of payment.
This news pushed Bitcoin's price higher immediately. PayPal has nearly 350 million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also has well over 20 million active merchants who can now accept the currency.
Aside from PayPal, this has further implications. PayPal also owns the widely popular payment app, Venmo. Venmo has more than 40 million active accounts, making the accessibility to Bitcoin and other cryptocurrencies even more significant.
While PayPal and Venmo are newer to crypto, there are a host of other applications that allow its users to buy, sell, and hold. Popular competitors to PayPal and Venmo, Square (SQ) and CashApp, also accept cryptocurrencies making the audience to Bitcoin even wider.
As discussed above, there is a growing narrative of Bitcoin as a safe-haven asset. In the current societal and economic climate there is a growing incentive to hold less cash and be hedged against intense market swings.
Recently, a trend started where publicly traded companies were beginning to convert cash in their treasuries over to Bitcoin as a more sound store-of-value. Most notably, MicroStrategy, a business analytics company, converted $425 million worth of cash in its treasury to Bitcoin. Shortly after the payments company Square made a $50 million purchase.
Since then, a number of companies have followed suit. The confidence that these companies and their investors have in Bitcoin has given increased merit to the concept of Bitcoin as a store-of-value and safe-haven asset.
Halving and the Stock-To-Flow Model
Perhaps the most important reasons for the rise in Bitcoin's price are two attributes that are inherent in its design.
The first: there is only 21 million Bitcoin that will ever exist. There will be no more and no less and this number will always stay static. This makes bitcoin more scarce than anything that has come before it. Other scarce assets are not 100% finite and in some cases, they can be synthetically manufactured.
The second is a process coded into Bitcoin called the halving. Essentially, Bitcoin has its own built-in escrow mechanism where Bitcoin is released and given to miners as a reward for processing transactions. This reward is cut in half every four years.
By doing so, Bitcoin's rate of inflation is reduced by half each halving and its stock-to-flow ratio is doubled each halving. This process continues every four years until all Bitcoin in this escrow mechanism is released and in circulation. From that point on Bitcoin in circulation will be capped at 21 million. As of the time of writing, there are 18,534,818 in circulation.
So far, Bitcoin's price has followed its stock-to-flow ratio very closely and if it were to continue on this trajectory Bitcoin's value could be somewhere around $100,000 in late 2021.
Rising Cost of Production
Another reason for Bitcoin's rise is that as the size of mining network grows, so does the mining difficulty -- which, in turn, increases the marginal cost to produce a bitcoin. Bitcoin mining requires a great deal of energy, and this has a real cost that must be paid by miners in their local currency. Because Bitcoin's protocol mandates one block be found, on average, every ten minutes, the more hashing power directed at mining does not increase the rate of new supply - it only increases the difficulty of mining. Research has shown the the price of a bitcoin has closely tracked its marginal cost of production.
Cryptocurrency Performance for 2020
2020 returns -
- Bitcoin (BTC): +111.66%
- Ethereum (ETH): +228.28%
- Ripple (XRP): +28.90%
- Bitcoin Cash (BCH): +31.91%
- S&P 500 : +8.35%
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