Bitcoin Bubble or Bust

20 Nov, 2020
Bitcoin Bubble or Bust

Don’t blink because you’ll miss one of the most exciting runups of Bitcoin (BTC) as it rushed past $18,000 USD on November 19. No doubt, it’s leaving crypto fans breathless.  Just look at the headlines: Bitcoin Explodes! Bitcoin Leaps! Bitcoin Soars! Those are just some of the headlines around the world as BTC inches toward its all-time high of nearly $20,000 in late 2017.

But hold on there.  Doesn’t anyone remember Black Thursday? Remember that day in March when the price of BTC plummeted to below $4,000 as the US stock market crashed?

Not every trader sees nothing but blue skies for BTC and cryptocurrencies in general. Yes there are some out there who wonder if and when the crypto shoe will drop again.

Whether you’re a bull or a bear, before you run to your respective corner, let’s take a look at what the pundits say are driving the runup.

Institutional Investors. These are the people who buy assets on behalf of others for investment purposes. In the fiat markets, institutional investors primarily buy securities (stocks), properties and other financial instruments.  These entities are a major force in the stock markets and have considerable influence in which way the markets move.

Lately, the crypto market has seen a surging interest by these groups in acquiring BTC for their portfolios.

"You can't buy bitcoin at Citibank or Bank of America, but their strategists are talking about it," Galaxy Digital CEO Michael Novogratz said in an interview with CNBC this week. "We're seeing institutions buy into this, we're seeing high net worth families buy into this, across the board you're getting institutional adoption."

Novogratz was referring to recent reports by analysts at traditional financial institutions such as JPMorgan and Deutsche Bank, who appear to be bullish on cryptocurrencies and the underlying blockchain.

“It’s (BTC) up over 70% over the last six weeks as more and more investors are starting to see it emerge as a credible asset to invest in,” said Deutsche Bank’s strategist Jim Reid in a Reid recently wrote in Deutsche Bank’s November Konzept report.  “In the long term, central bank digital currencies will replace cash.”

The interest in BTC by institutional investors is the key to avoiding the “speculative frenzy” that drove the runup in the coin in 2017, Novogratz said on CNBC, as he predicted BTC could reach $60,000 by the end of 2021.

Scarcity Mentality. Just 21 million BTC were created by Satoshi Nakamoto, and it is estimated that nearly 90% of those coins have been mined.  This limited supply creates a scarcity mentality among those with “FOMO” or fear of being left out.  With around 3.4 million BTC left to be mined, the coin becomes more and more attractive.

“The perceived scarcity, or supply limit, of an asset doesn’t magically confer value to it,” wrote Mark DeCambre in MarketWatch. “But the belief that there will be fewer opportunities to obtain bitcoin, or that it will reside in the hands of a select few, is often cited as a reason that demand for bitcoins has returned.”

Devaluated USD. As this “gold standard” of fiat currency continues to struggle to hold its value, alternatives are becoming more and more attractive.

“Money is being devalued. Over the last three years, stocks are up about 6% a year – not really that great,” Mark Yusko, CEO of the Investment Firm Morgan Creek Management said recently, according to CoinDesk. “But if you denominate in gold instead of dollars they’re down 44%; if you denominate in bitcoin it’s way worse.”

Move toward mainstream adoption. This year’s news on digital currencies included a drip-type campaign of stories about companies such as Square buying BTC and others who are adding BTC as an accepted form of payment. And like it or not, the global discussion over central bank digital currencies (CBDCs).  This growing awareness of the value of digital coins in general is also seen as pushing BTC into new territory.

With all this good news, let’s not forget the bears out there who are still concerned that this new BTC bubble could burst. Shane Oliver, head of investment strategy and chief economist at AMP Capital, was blunt in his assessment of the current runup.

“Its huge volatility hardly makes it a safe haven as a store of value,” he said in a recent BBC interview.  ‘I have far more confidence in the $50 note in my wallet retaining its value over time than Bitcoin, which seems to bounce around like a yo-yo. Its rebound is creating more interest from speculators and so they are jumping in which then pushes it even higher,’ added Mr Oliver.

“People keep worrying about the great sell-off like March, but exchanges don't have as many idle Bitcoins (waiting to be sold) as that day,” CryptoQuant CEO Ki Young Ju said to CoinTelegraph.

So what’s it going to be:  bubble or bust?  Enthusiasts are hoping for the former, yet the market always finds a way to shake things up.  Where BTC goes from here remains to be seen. But for the moment, enjoy the ride.

Joyce Pavia Hanson
Contributor

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