Bitcoin is on Fire But is it Just a Flash in the Pan?

2020 was a tough one unless you invested in Bitcoin that is! Then it was probably the year when some of your dreams unexpectedly came true.

After a fairly quiet year, bitcoin prices began to take off in October 2020 and haven’t looked back since. Now, in 2021, the cryptocurrency is trading at over 300% of its September ’20 price.

For some, especially the crypto sceptics, this sudden climb is just another speculative “bubble” like the now infamous 2017 rally which saw BTC value double almost overnight just to tumble back down within a few short months.

2017 vs 2020 - The Differences

But there are subtle signs that this time around, things will not be the same. According to the experts, the naysayer’s predictions of another epic crash to follow the latest rally are unlikely to come true.

The most significant difference between the two events lies in who is doing the buying. In 2017, the price was driven up by small investors and day traders jumping on the bandwagon and buying their piece of the crypto pie.

In this period, the number of wallets holding one bitcoin rose dramatically, but the number holding 1000 BTC or more fell, indicating increased interest from retail investors while larger HODLings were being sold off.

Institutional Investors

Now, major institutional investors are the primary engine driving the upward climb. It all started in May when Paul Tudor Jones, the billionaire founder of Tudor Investment Company, created waves by purchasing bitcoin, which was still considered a fringe asset by other investors of his standing.

It was not the first time Jones had dabbled in the crypto markets. According to Bloomberg, his fund traded BTC during the 2017 rally but got out just before it hit its peak, presumably making a killing in the process.

However, this time around it appears the motivation was different. As governments print money to battle the coronavirus pandemic, investment funds all over the world are looking for a reliable hedge against the looming threat of inflation, and Jones decided Bitcoin fit the bill.

 “I am not a hard-money nor a crypto nut,” he stated in a market outlook note he wrote in May. “The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by Covid-19.”

Jones’ example was soon followed by other big-money men. Microstrategy made financial news headlines by going into debt to invest heavily in the crypto asset, a move that, so far, it has no cause to regret. And it is not just obscure investment firms that are warming up to cryptocurrencies.

Move to Mainstream Payment Solution

Another big boost to BTC price was given by PayPal’s announcement that they would support crypto payments on their platform. This was followed by credit card giant partnering with BlockFi to create a card that rewards customers with BTC. 

Over the last decade, cryptocurrencies have gained slow but sure acceptance as a digital payment method. The first retail transaction in BTC occurred on 22 May 2010 when one Laszlo Hanyecz bought two pizzas in Jacksonville, Florida, for 10,000 BTC, an amount worth $338,180,000 today.

Since then, the number of businesses accepting digital money payments has steadily increased. The gambling industry, as early adopters, contributed greatly to this. Nowadays, new online casinos such as 777bay.com offer the convenient choice of depositing/cashing out in crypto while still playing in fiat to avoid volatility issues.

Nevertheless, cryptocurrencies had remained outside the mainstream until PayPal’s announcement. However, PayPal had a net payment volume of around 246.7 billion U.S. dollars in the third quarter of 2020, the period after it began providing crypto services. This is a staggering 38 percent year-on-year growth, mainly driven by BTC usage.

This combination of major institutional investment and increased day-to-day use after PayPal’s seal of approval is the reason behind BTC’s current price. Whether it will be enough to keep it at its current level remains to be seen.

While the future looks bright for bitcoin, and cryptos in general, there are still investors and analysts who believe it is all just a bubble on the point of implosion. One thing that both BTC fans and detractors agree on though, is the asset is a long way from finding its true market value.