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Why Is Bitcoin Price Surging? Here Are 3 Plausible Reasons

November 24, 2020 at 10:16 by Mark Stevenson

2020 turned out to be not only rich in turmoil, but also extremely successful for Bitcoin investors. Fueled by global uncertainty, turbulence in financial markets, and devaluations, the price of Bitcoin approached December 2017 levels.

The 2020 Bitcoin rally is significantly different from the previous one. In this article, EarnForex sheds light on the 3 plausible reasons why Bitcoin is exploding higher.

3 reasons Bitcoin price is surging

  1. The ongoing Bitcoin rally only visually resembles the trajectory of the events of 2017 but differs significantly in the context of fundamental factors.
  2. Institutional interest in the first cryptocurrency is growing, which is manifested in the volume of investments, the emergence of new large market participants, and activity on regulated exchanges.
  3. The Bitcoin rhetoric has improved significantly, with more and more opinion leaders talking about BTC as a defensive asset and store of value.

Let’s now expatiate on these 3 key factors driving Bitcoin price higher.

The trajectory of Bitcoin’s price movement

Since the beginning of the year, digital gold is up 158%, from just above $7,000 to $18,550 (as of November 22). During the same period, the price of gold rose by 23%, while the quotes of the S&P 500 index — by only 10%.

Growth dynamics of Bitcoin (candlestick chart), gold (yellow line), and S&P 500 (purple line) since the beginning of the year. Messari data as of November 22.

At the time of writing, the price of Bitcoin is only 6.85% below the all-time high of $20,089 recorded almost three years ago.

Data: Messari.

The trajectory of Bitcoin’s price movement is very similar to the 2017 rally when a large part of the community was obsessed with the “ICO fever”. Then the market infrastructure was not ready for institutional money, and the head of JPMorgan Jamie Dimon even slammed Bitcoin as “fraud and scam” and threatened to fire the “stupid crypto traders”.

At the end of 2017, when Bitcoin was at roughly the same highs, Google Trends’ performance for the search term ‘bitcoin’ was five times higher than the current one. The price of any asset rises if demand exceeds supply.

Halving boosted BTC price

The Bitcoin protocol provides for a two-fold decrease in the rate of emission of coins received by miners that occurs every four years. The latest BTC halving made the coin even more scarce, especially against the backdrop of many fiat currencies depreciating due to unprecedented monetary and fiscal measures by the authorities.

The strictly limited supply of bitcoin and the regular decrease in the rate of its emission creates the preconditions for the long-term growth of the cryptocurrency, provided that the demand for it remains constant or increasing.

Against the backdrop of global uncertainty and falling confidence in traditional markets, generously pumped by the depreciating fiat currency, Bitcoin has become attractive for large investors who prefer a long-term investment horizon.

This thesis is supported by the results of the Chainalysis study. The company’s analysts recalled that the miners had only 3.4 million BTC left to mine. 77% of the coins already mined and not lost (14.8 million BTC) are stored in “illiquid” wallets, from which, on average, less than a quarter of the received assets go.

Since reaching a price record in 2017, the number of bitcoins on the so-called “investor wallets” has increased by almost 3 million.

Over the same period, on the traders’ wallets, which are characterized by increased liquidity, this indicator, on the contrary, decreased. Chainalysis believes that market speculators provide an offer for “new investors”.

The experts found confirmation of the involvement of institutional investors in increasing the number of large transfers from exchanges. Data: Chainalysis.

The analysts identified institutional investors and corporations as long-term Bitcoin holders. They cited purchases by Square, MicroStrategy, and Paul Tudor Jones. For these buyers, Bitcoin is insurance against inflation and other troubling economic trends.

Chainalysis concluded that purchases of the flagship cryptocurrency in 2020 compared to 2017 are more strategic than speculative. Some experts have predicted that other institutional investors will come into the market and thus spur further massive adoption. This prediction will come to pass when Bitcoin attains the status of an effective instrument for hedging macroeconomic risks.

It is worth noting the trend associated with halvings towards a gradual decrease in selling pressure from miners.

There is also an unpopular opinion regarding the influence of halving on the price of bitcoin. According to Coin Metrics co-founder Nick Carter, there are other important growth drivers for the first cryptocurrency. Carter said:

I don’t think halving had an impact on the price of bitcoin. This is an event that has been known since day zero. I think the catalysts are outside the market or have to do with infrastructure.

The expert agreed that the current growth is more robust compared to three years ago.

The MicroStrategy effect and institutional interest

In August, analytics software provider MicroStrategy bought 21,454 BTC ($250 million at the time of the deal), becoming the first public company to invest in Bitcoin. Against the background of the corresponding statement, shares quoted on the Nasdaq soared at the moment by 14.6%.

In September, MicroStrategy CEO Michael Sailor announced the purchase of an additional 16,796 bitcoins ($175 million at the time of purchase). He estimated the company’s total investment in the first cryptocurrency at $425 million, including fees and costs.

At the exchange rate for November 21, the acquired Bitcoins by MicroStrategy are estimated at $714 million. This means that investments in the cryptocurrency have grown by 68% over several months — or by $289 million. However, the company is not going to take profits yet — Sailor promised not to sell bitcoins for a century.

In early October, Twitter creator Jack Dorsey’s payment company Square announced a $50 million purchase of bitcoins, roughly 1% of the company’s total assets.

Another resonant manifestation of the “MicroStrategy effect” was the news about the launch by the payment company PayPal of the possibility of buying and selling bitcoin. The company said the new feature will spur global use of cryptocurrencies and prepare the network for central bank digital currencies.

CEO Dan Shulman believes Bitcoin will ultimately be used more for day-to-day payments, rather than as a store of value.

In November, PayPal opened access to Bitcoin and several altcoins for the company’s American customers. By the first half of 2021, the functionality will be available to users from other countries.

Representatives of the Pantera Capital fund are convinced that the beginning of support for bitcoin by the payment company PayPal will significantly impact on BTC shortage and, thus, lead to an increase in the price of Bitcoin.

According to the company estimates, Square’s Cash app accounts for 40% of all Bitcoin issued. At the moment, we are already seeing a huge impact on the market with the recent launch of PayPal as a direct cryptocurrency purchase service.

The demand of large players for bitcoin and products based on it is also evidenced by the dynamics of the value of crypto assets managed by Grayscale Investments — on November 18, the investment firm reported that the indicator exceeded $10 billion for the first time.

Just two days later, the value of funds at the disposal of Grayscale Investments reached $11.3 billion.

The most popular product of the company remains the GBTC bitcoin trust. It accounts for $ 9.65 billion, which is 85% of total assets.

According to information on the Bitcoin Treasuries website, the volume of investments of public companies in the first cryptocurrency exceeded $14.15 billion. Grayscale Investments alone holds 2.43% of the total supply of digital gold. The aggregate figure for companies from the Bitcoin Treasuries list is 4.01%.

The demand from large players is likely largely due to the fact that in today’s environment, Bitcoin is increasingly perceived as a digital store of value. The first cryptocurrency is distinguished not only by the ability to hedge inflation risks but also by the ability to significantly increase the profitability of a diversified investment portfolio.

Mexican billionaire Ricardo Salinas Pliego, who has invested 10% of his funds in bitcoin, is confident that the first cryptocurrency “protects the citizen from expropriation [of assets] by the state.”

Earlier, the founder of Grupo Salinas posted a video showing trash bags with Venezuelan bolivars.

The businessman wrote:

I am sharing a video from a Latin country where banks are throwing money away (paper money costs nothing). Therefore, it is always good to diversify your investment portfolio.

Key take away

From the foregoing, Bitcoin’s ongoing rally is indeed in many ways different from what happened at the end of 2017. This is evidenced by the involvement of large players, the absence of excessive hype, the perception of digital gold as a store of value and a hedging asset, as well as various on-chain metrics.

The bitcoin rhetoric has changed so much in recent years that even outgoing SEC chief Jay Clayton admitted that Bitcoin can be seen as a store of value and settlement against the “inefficiency” of current payment systems.

If Bitcoin continues to be perceived as a hedge against negative macroeconomic trends, an increase in the influx of institutions can be expected. This will mean even greater integration of Bitcoin with the traditional financial market, tougher competition for a scarce asset, and further growth in its price.

If you have any questions and comments on Bitcoin today, use the form below to reply.

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