Bitcoin's Price Surge in 2021
The price of bitcoin could hit $100,000 by mid-2021 and possibly $300,000 by the end of 2021. The cryptocurrency has experienced a massive surge in recent weeks, rising from around $10,500 in October to above $31,881.65. As of January 2nd, 2010. It is currently trading at its highest level since late 2017 when it hit an all-time high of $20,000.
Other major cryptocurrencies have also seen a recent increase, with Ethereum (ether), ripple (XRP), and Litecoin rising by between 10 and 25 percent over the last week. The bull-run has been spurred on by massive institutional investment, which has seen cryptocurrencies increasingly viewed as a haven asset like cash or gold during times of economic uncertainty and stock market volatility.
The whole existence of bitcoin has been characterized by unthinkable rallies followed by painful corrections (the type of pattern that sustains a long-term trend. Bitcoin's finite supply, which limits the number of units in existence to 21 million. This means it is not susceptible to artificial inflation techniques like quantitative easing.
This makes it an attractive investment prospect at times of geopolitical turmoil when traditional markets are unstable, and governments seek to provide economic relief at the risk of inflation. As central banks continue printing more money to alleviate the financial downturn, investors are looking for an asset that serves as a hedge, and bitcoin seems to be the answer.
Bitcoin's volatile history
On January 3rd, 2009, the genesis block of bitcoin appeared. It came less than a year after the pseudonymous creator Satoshi Nakamoto detailed the cryptocurrency in a paper titled 'Bitcoin: A Peer-to-Peer Electronic Cash System.
On May 22nd, 2010, the first-ever real-world bitcoin transaction took place; two pizzas were purchased for 10,000 bitcoins – the equivalent of $90 million at today's prices. In October 2013, the first-ever bitcoin ATM was installed in a coffee shop in Vancouver, Canada. The machine allowed people to exchange bitcoins for cash.
Investors hoping to make a quick profit from the cryptocurrency should be wary of its notorious volatility, which saw it fall to less than a quarter of its value following the 2017 run.
During the last bull run, 30 to 40 percent corrections were the norm. Each time prices rose to new highs, a steep correction followed.
Bitcoin has grown from what was once considered a scam by many into something that has matured into a viable investment made large by institutions and retail investors alike. Why are these investors so bullish on Bitcoin even after it has surpassed all-time highs.
Inflation and the lowering purchasing power amidst massive stimulus spending drive people to store-of-value assets, including Bitcoin. Institutional adoption as both 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 immense maturity over recent years, making it easier and far safer to invest than ever before.
Inflation and the Lowering Purchasing Power of the Dollar
Since the gold standard was removed in 1971 by Richard Nixon, the amount of circulating dollars has steadily increased. Between the years 1975 and just before the coronavirus hit, the total money supply has increased from $273.4 billion to over $4 trillion as of March 2020. Since that date, the real money supply has gone from $4 trillion to over $6.5 trillion as of November 2020.
Many assets are considered store-of-value. Perhaps the most common assets that come to mind are precious metals like gold or other things with limited supply. We know that it is a scarce resource with gold, but we cannot verify with complete certainty how much exists.
Why this Matters to Bitcoin
This is where Bitcoin differentiates itself. It is written into Bitcoin's code how many will ever exist. We can verify with certainty how many live now and how many will exist in the future. This makes Bitcoin the only asset on the planet that we can prove has a finite and fixed supply.
Unlike digital currencies, such as Bitcoin, which have verifiable scarcity and thinking about that in the context of Fiat currencies. Like the US dollar, which seemingly is being printed unlimitedly. Part of Bitcoin's price appreciation can undoubtedly be attributed to fears of inflation and its use as a hedge against it. With further money printing on the horizon, it is fair to say that inflation will continue, making a case for store-of-value assets more compelling.
To further understand why Bitcoin has a verifiable finite limit to its quantity, it is essential to understand the mechanism built into its code known as the Halving. 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, built into Bitcoin is a synthetic form of inflation because Bitcoin's reward to a miner adds new Bitcoin into circulation. This inflation rate is cut in half every four years, and this will continue until all 21 million Bitcoin is released to the market. Currently, there are 18.5 million Bitcoins in circulation or about 88.4% of Bitcoin's total supply. Why is this important?
As discussed before, the rising inflation and growing quantity of the US dollar lower its value over time. With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its inflation rate relatively consistent.
With Bitcoin, each Halving increases the assets stock-to-flow ratio. A stock-to-flow rate means the currently available stock circulating in the market relative to the newly flowing stock added to circulation each year. We know that the stock-to-flow ratio, or current circulation relative to new supply, doubles every four years.
Since Bitcoin's inception, its price has followed too close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has crushed its previous all-time high. The first Halving, which occurred in November of 2012, saw an increase from about $12 to nearly $1,150 within a year. The second Bitcoin halving occurred in July of 2016. The price at that Halving was about $650, and by December 17th, 2017, Bitcoin's price had soared to just under $20,000. The price then fell over a year from this peak down to around $3,200, a price nearly 400% higher than Its pre-halving price. Bitcoin's third having just occurred on May 11th, 2020, and its price has since 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 trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future. Theoretically, this price could rise to at least $300,000 sometime in 2021.
Bitcoin as a store of value has increased substantially in 2020, but not just with retail investors. Both public and private institutions have been accumulating Bitcoin instead of holding cash in their treasuries.
Licensed and regulated exchanges that are easy to use are abundant in the US. Custodial services from legacy financial institutions that people are used to are available for the less tech-savvy. Derivatives and blockchain-related ETFs allow those interested in investing but fearful of volatility to become involved. The number of places that Bitcoin and other cryptocurrencies are accepted as payment is increasing.
Along with all of this, large institutional players' confidence showcased by both their offering of crypto-related products and investment into Bitcoin has changed the investment landscape in 2020.