As of December 16, Bitcoin has soared by about 195% so far, reaching $ 23,000, but what is driving this meteoric rise? The reasons for its appreciation vary, but Bitcoin has grown from what was once considered a scam by many to something that has matured into a viable investment made by famous billionaire investors, large organizations, and retail investors alike. Why are these investors so bullish on Bitcoin even after it surpassed all-time highs?
- Inflation and the lower purchasing power amid massive stimulus spending are driving people to store assets of value, including Bitcoin.
- Bitcoin’s mining prize halving mechanism further proves its scarcity and merit as a store asset of value.
- Institutional adoption as an investment and as a service they can provide shows strong confidence in the future of Bitcoin and cryptocurrency.
- The infrastructure built around cryptocurrency and Bitcoin has shown tremendous maturity over recent years making it easier and much safer to invest than ever before.
Inflation and the Purchasing Power of the Dollar
Since the gold standard was removed in 1971 by Richard Nixon the amount of dollars in circulation has steadily increased. Between the year 1975 and just before the coronavirus hit, total money supply has increased from $ 273.4 billion to over $ 4 trillion as of March 9, 2020. Since that date, total money supply has gone from $ 4 trillion to over $ 6.5 trillion as of Nov. 30, 2020, largely due to coronavirus virus-related stimulus bills.
Congress is currently in talks to pass another stimulus bill of nearly $ 1 trillion, aimed at helping those suffering from the coronavirus. If this new stimulus bill were passed, it would mean that about 50% of the total US dollar supply in the world will have been printed in 2020 since the start of coronavirus.
While people are certainly suffering from lack of jobs and business closures, the increase in the money supply has significant long-term implications for the buying power of the dollar.
The stimulating spending has, and deservedly, led many to fear much larger inflation rates. To hedge against this inflation investors have sought assets that either maintain value or value in value. During 2020, this search for a store asset of value to hedge against inflation has brought them to Bitcoin. Why?
There are many assets that are considered a store of value. Perhaps the most common assets that come to mind are precious metals like gold or other things with limited supply. With gold, we know it is a scarce resource, but we cannot verify with absolute certainty how much exists. And, while it may seem far away, gold exists outside the earth and may one day become available through asteroid mining as technology advances.
Why is this important for Bitcoin
This is where Bitcoin differentiates itself. It is written to Bitcoin code how many will never exist. We can check with certainty how many exist now and how many will exist in the future. This means that Bitcoin is the only asset on the planet we can test that has a finite and stable supply.
In Express Investopedia’s podcast with editor-in-chief Caleb Silver, Michael Sonnenshein, board member of Bitcoin Grayscale Trust, said: “How much financial stimulus has been injected into the system as a result of the COVID pandemic to stimulate the economy and get things to move again, I think that has caused investors to think about what constitutes a store of value, what an inflation hedge is and how they should protect their portfolios. ”
Sonnenshein elaborated further saying: “It’s important that investors think about that. And I think a lot of them actually think of the juxtaposition of digital currencies, like Bitcoin, that have a verifiable shortage and think of that in the context of Fiat currency, like the US dollar that seems to be getting print it unlimited. ”
Part of the appreciation of Bitcoin prices can certainly be attributed to fears of inflation and its use as a hedge against it. With further money printed on the horizon of stimulus packages, as well as talks about student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store assets of value more compelling.
To further understand why Bitcoin has a finite limit that can be verified to its size, it is important to understand the mechanism embedded in its code known as Hello. Every 210,000 blocks mined, or about every four years, the reward given to miners for processing Bitcoin transactions is reduced in half.
In other words, embedded in Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin in circulation. This rate of inflation is cut in half every four years and this continues until all 21 million Bitcoin are released into the market. Currently, 18.5 million Bitcoins are in circulation, or about 88.4% of Bitcoin’s total supply. Why is this important?
As discussed before, rising inflation and the increasing size of the US dollar are declining in value over time. With gold, a fairly constant rate of new gold is mined from the earth each year, which keeps its inflation rate relatively constant.
With Bitcoin, each halving increases the stock-to-flow ratio of assets. A stock-to-flow ratio means that the stock currently available is circulating in the market compared to the newly flowing stock being added to circulation each year. Because we know that the stock-to-flow ratio, or the current circulation compared to a new supply, doubles every four years, this metric can be plotted in the future.
Since the inception of Bitcoin, its price has followed very closely its rising stock-to-flow ratio. Each halved Bitcoin has experienced a huge bull market that has always crushed its peak.
The first halving, which occurred in November 2012, saw an increase from about $ 12 to nearly $ 1,150 within a year. The second Bitcoin halving occurred in July 2016. The price at that halving was around $ 650 and by December 17th, 2017, the Bitcoin price had soared to just under $ 20,000. The price then fell over a period from this peak down to about $ 3,200, a price nearly 400% higher than its pre-halving price. A third Bitcoin has just happened on May 11th, 2020 and since then its price has increased by almost 120%.
Bitcoin’s price increase can also be attributed to its stock-to-flow ratio and deflation. Should Bitcoin continue on this path as it has in the past, investors are looking to face significant downsides in the near and long term. Theoretically, this price could rise to at least $ 100,000 sometime in 2021 based on the stock-to-flow model shown above.
Some investment firms have predicted Bitcoin prices based on these basic analytics and shortage models. In CitiFX Technical Analysis dropped Tom Fitzpatrick, US managing director of Citibank, called for Bitcoin $ 318,000 sometime in 2021. Live on Bloomberg Scott Minerd, Chief Investment Officer of Guggenheim Global, called for $ 400,000 Bitcoin based on their “basic work.”
As discussed, the narrative of Bitcoin as a store of value has grown significantly in 2020, but not just with retail investors. Many organizations, public and private, have been accumulating Bitcoin instead of holding cash in their treasures.
Recent investors include Square (SQ), MicroStrategy (MSTR), and most recently the insurance giant MassMutual, among many others. In total, companies have bought 938,098 Bitcoin which are now priced at the time of writing at $ 19,450,247,760, most of which accumulated this year. The largest accumulator has come from the Grayscale Bitcoin Trust which now holds 546,544 Bitcoin.
Investments of this size suggest strong confidence among these institutional investors that the asset will be a good hedge against inflation as well as providing a solid price appreciation over time.
Apart from companies buying Bitcoin, many companies are now starting to provide services for them. PayPal (PYPL), for example, has decided to allow crypto access to its over 360 million active users. Fidelity Digital Assets, launched back in October 2018, has long provided custodial services for cryptocurrencies, but they now allow clients to pledge bitcoin as collateral in a transaction. The CBOE and CME Group (CME) plan to launch cryptocurrency products next year. The number of banks, broker dealers, and other organizations trying to add such products is too much to name, but just as a company must have confidence in investment, it must also have confidence that the products they sell have value.
Central banks and governments around the world are also now considering the potential of central bank digital currency (CBDC). Although these are not cryptocurrencies as they are not devolved, and core control over supply and rules is in the hands of banks or governments, they still show government recognition of the need for a larger payment system advanced than paper money provides. This lends itself further to the concept of cryptocurrencies and their convenience in general.
From its initial basic use as a method to buy drugs online to a new financial medium that provides probabilistic scarcity and ultimately transparency with its immovable ledger, Bitcoin has come a long way since its release in 2009. Even after realizing that Bitcoin and its blockchain technology could be used for way more than just the silk road, it was still to be almost impossible for the average person to participate in previous years. Wallets, keys, swaps, the ramp were confusing and complicated.
Today, access is easier than ever. Easy-to-use licensed and regulated exchanges are abundant in the US. Custodial services from former financial institutions that people are used to are available for the less technological. Derivatives and blockchain-related ETFs allow those interested in investing but fearing volatility to participate. The number of places where Bitcoin and other cryptocurrencies are accepted as payment is growing rapidly.
In the Investopedia Express podcast, Sonnenshein of Grayscale said “today’s market has just developed so much more where we were back then (peak 2017), we’ve really seen the development of two-sided market derivatives options, lending markets and futures lending. . It’s a much more robust 24-hour double-sided market that begins to operate more and more mature with each passing day. ”
Along with all of this, the confidence shown by major institutional players through their offering of crypto-related products as well as obvious investment into Bitcoin speaks volumes. 99Bitcoins, a site that increases the number of times an article has declared Bitcoin dead, now holds Bitcoin at 386 deaths, its latest death being November 18th, 2020 and the oldest death being October 15th , 2010. With Bitcoin grinding through its all time high and getting more institutional infrastructure and investment than ever, it doesn’t seem to be going anywhere.