THE RECENT BITCOIN BOOM: ACCEPTANCE OR SPECULATION?

by | Feb 1, 2021 | Finance, Growing Your Money, Investment, Wealth Management

Not long ago, Bitcoin was viewed a kind of electronic currency (if it was understood at all). It appealed only a few tech enthusiasts, trading speculators, and even criminals. Over the last two years, however, Bitcoin’s soaring price has put it in the radar of every type of investor.

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This is no surprise. The first Bitcoin traded in October of 2009 was valued at $0.0009 USD. Fast forward to January of 2021. There you’ll see a historical maximum price of over $40,000 USD per unit.

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There are multiple explanations of the recent upsurge in cryptocurrency demand. Bitcoin is leading the charge. Some investors seem to be looking to hedge against an uncertain economic future. Governments across the world have been pumping loads of cash into their economies due to the Covid-19 crisis. No one knows for sure when this period will pass.

This could lead to inflation and a decline in value of fiat currencies. Others are searching for higher returns over traditional investments. They are accepting riskier products such as cryptos.

Institutional demand for Bitcoin has gone up

An increase in institutional demand for Bitcoin is also playing a role. Not everyone agrees that it is the main reason for the surge. However there is no question that large, corporate investors are joining the Bitcoin fever.

For example, US insurance giant Massachusetts Mutual Life Insurance Co. purchased $100 million Bitcoin in December, 2020. Then there was October of last year. That’s when payments giant (and perceived rival) PayPal announced that its users would be able to purchase and trade with Bitcoin and a few other cryptos. That news pleased many enthusiasts.

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BlackRock (the world’s largest asset manager) is now adding Bitcoin futures to its product offering.

Cryptocurrency funds for retail investors are still very few. But that will likely change. The best-known fund manager in the digital space is Grayscale. That company offers a Bitcoin trust (BIT) and a few other crypto options. What about Canada? Investors here can purchase a fund on the TSX that tracks Bitcoin’s price, via this Bitcoin Fund (TSX:QBTC.U) from Toronto-based 3iQ.

Bitcoin has many detractors

Bitcoin, of course, has many detractors. Critics are quick to point out its history of massive volatility. And they are correct. Bitcoin’s rise in value has been anything but smooth. Anyone who follows the news has seen this. Leading the way have been major drops in price coming right after a boom. Need proof? Check out the most recent price movements. After reaching $40,000 in value on January 9, 2020, the price dropped beneath $29,000 just twelve days later, only to recover slightly.

This is typical Bitcoin behaviour – if such a thing exists. Many investors affirm that upswings are contrived by a small number of major holders (aka whales). They’ll inflate demand only to drop large amounts of Bitcoin after the price reaches a desired level. This is the “pump and dump” tactic. It’s not surprising. The cryptocurrency market is young and the risk of price manipulation is real.

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The big question is whether the increase in the value of Bitcoin comes down to acceptance or mere speculation.

Adoption is the biggest hurdle for any new asset class. Bitcoin and other cryptos were developed on the principle of decentralization. That’s where no single authority can control the trade. Instead, transactions are carried out peer-to-peer and regulated by the whole network (blockchain), as explained in a previous article. This poses a major challenge to traditional financial markets, central banks and governments.

Is it a mainstream asset?

If the new technology prevails and is adopted by these actors, Bitcoin and other cryptos will become mainstream assets. But, what if the same institutions react with hostility at a perceived threat? Then Bitcoin could be relegated to a small niche in the market. It could even become extinct.

This poses a dilemma for investors. Remember, it is unwise to get carried away by the temptation of instant massive returns. Anyone interested in Bitcoin should become educated on cryptocurrencies. Just don’t go crazy. Selling the house in order to invest in Bitcoin would be a horrible mistake. That said, ignoring these new asset class altogether could also end up being a major blunder.

Legal Disclaimer: the contents of this article are for information purposes only. Contents here are not intended to provide any form of financial or investment advice.

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