It seems that it’s impossible to stop bitcoin at the moment. After surpassing $20,000, the first cryptocurrency continued its growth and right now is above $25,000. The BTC dominance in the cryptocurrency market is within 70%, so it is not surprising that the entire market began to grow along with bitcoin. However, a lot of altcoins are still lagging behind bitcoin in terms of growth. For example, the price of XRP to Euro and USD has significantly dropped due to the recent lawsuit from the Securities and Exchange Commission (SEC).
Many investors are wondering how long this price rally will last and what is behind it. It is difficult to say with certainty what is the main driver of general optimism in the market, but there are several macro trends that support the current narrative.
According to many crypto enthusiasts, halving is one of the main fundamental reasons why we have faced the current bitcoin rally. Halving occurs every 210,000 blocks, on average every four years, and means the reduction of the reward for bitcoin mining in half. Each time the bitcoin price has shown a rapid rise shortly after the event took place.
For example, in November 2012 the first halving took place. The bitcoin price surged from $12 to $1,150 in less than a year. But then the price fell and a prolonged correction followed. The second Bitcoin halving occurred in July 2016, when the bitcoin price was around $650. However, in December 2017, the bitcoin price approached $20,000. As in the first time, there was a correction that lasted about a year after the price rally. In May 2020, the last bitcoin halving took place. Then the price was within $9,000 and its price has since increased by more than 200%.
The reason for bitcoin’s sharp growth after the halving is the decrease in newly flowing coins being added to circulation while the demand for bitcoin is growing due to mass adoption among retail and institutional investors. Bitcoin’s current price movement is also similar to the potential movement in the stock-to-flow model. According to this model, the bitcoin price could reach $100,000 sometime in 2021. However, it is worth noticing that after a bitcoin rally a decent correction often occurs.
Lowering Purchasing Power of the USD
While bitcoin is experiencing an increase in deflation, inflation looms over the US dollar. The USD is the most traded national currency for bitcoin, so the situation with the dollar strongly affects the bitcoin price.
Since March 9, 2020, the total US dollar supply has gone from $4 trillion to over $6.5 trillion as of November 30, 2020, largely due to coronavirus related stimulus bills. The next stimulus package, worth almost 1 billion dollars, could be approved soon. This would mean that around 50% of the world’s total supply of US dollars will have been printed in 2020.
The surge in the money supply raises concerns among investors about the purchasing power of the US dollar in the long term. This is compounded by the fact that the Fed is going to hold the 0% base rate until the situation stabilizes. Such a situation forces investors to pay more attention to the store of value assets. And bitcoin is one of these assets.
Bitcoin is still quite a volatile asset and some investors are questioning bitcoin’s ability to be a store of value despite strong long-term growth. However, others saw an alternative in bitcoin to gold and bonds since the investor knows exactly how many bitcoins exist now and how many will exist in the future, you can subscribe to this for more detail. As the purchasing power of the US dollar declines, store of value assets may see more interest among investors.
Increased interest among institutional and large investors
Bitcoin’s growth is fuelled not only by retail investors and crypto enthusiasts but also by large investors. Many well-known companies have shown serious interest in bitcoin as a safe haven and investment opportunity. For example, Microstrategy and Square have added large sums of Bitcoin to their treasury holdings. According to Bitcoin Treasuries, institutional and large investors accumulated over 1 million bitcoins in 2020. It’s more than 5% of the total bitcoin supply.
In addition, optimism about bitcoin and the cryptocurrency market could have been generated by PayPal which announced cryptocurrency support. According to the announcement, in early 2021, PayPal customers will be able to convert their selected cryptocurrency balance to fiat currency with no incremental fees. Paypal will support Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. There won’t be any additional integrations or fees for merchants to use cryptocurrencies. But it’s important to say that users won’t be able to send crypto to their personal wallets. Cryptocurrencies can only be used as a funding source for digital commerce to purchase goods from merchants within the Paypal ecosystem.
In turn, interest in bitcoin futures has significantly increased recently among institutional investors on the CME, CBOE, and other exchanges. This suggests that the bitcoin growth is organic and many investors are sure of the further bitcoin rise.
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