There’s no hiding it: Bitcoin is hot.

We have seen the crypto market swing wildly up and down this month — which is much more than a regular company listed on the stock exchange would do in an entire year.

Bitcoin has gone from US$29,000 per coin to US$41,000, then fallen all the way back down to US$30,000. This has rattled a lot of retail and institutional investors.

Sometimes markets are bullish or bearish without a clear reason behind them. But regardless of this price volatility, there are actual reasons behind this crypto spike and dip.

 

What specifically happened to drive the price of bitcoin up?

 

Increased mainstream acceptance was a game changer for bitcoin.

On 12th November 2020, PayPal officially announced the adoption of cryptocurrencies on their platform for users in the USA.

Source: TechCrunch

 

I believe that this was partly the reason for the price of bitcoin to keep climbing.

Also, governments and central banks are continuing to flood the global economy with money by rolling out stimulus packages for businesses and citizens.

I previously wrote about the fear of hyperinflation in my previous article on the subject.

This fear could be intensifying and getting stronger. Cryptocurrencies like bitcoin apparently promise protection from hyperinflation. They are now being seen as a hedge against this risk.

Something else has also been happening between January 2017 to January 2020. It’s the rise of institutional investors.

 

Source: CoinDesk

 

If you look at the chart above, you can see that the number of institutional investors investing in bitcoin have grown by nearly 3 million within a three-year time frame.

When it comes to institutional investors, these three factors apply:

  • They have a lot of money to invest.
  • They are usually more savvy than the average retail investor.
  • They usually invest in something for the long-term.

If we put this fact into perspective:

  • Let’s assume that around half of these institutional investors invest in one bitcoin each.
  • That is around 1.5 million bitcoins locked away for a long time.
  • There can only ever be a maximum circulating supply of 21 million bitcoins.

What does this mean?

Well, let’s assume that we’ve maxed out the circulating supply of bitcoin. There are only 21 million in existence. If institutional investors start hoarding them, that’s about 7% of the market being locked away for the long-term. These coins will no longer be able to be actively circulated through exchanges.

But what if that number grows to 14%? Or even 21%?

This future trend could have a significant impact on the supply and demand for bitcoin. We may be seeing signs of it happening now.

 

 

Why did the bitcoin price surge stop and dip about 25%?

 

On 12th January, bitcoin fell from about US$40,000 per coin to US$30,000.

The reason behind this initial pullback was unclear.

 

Source: TradingView

 

Many investors and bitcoin analysts follow charts like the Miner Position Index, shown above.

It displays the 30-day moving average of the outflow in dollar terms.

Any reading above 2.0 gives an indication that a lot of miners are selling their bitcoin.

When the chart began to hit 2.2, some believe that bitcoin investors saw this, and they started to panic-sell.

In particular, one individual trader set a sell order for 180 bitcoins.

This drove the price down instantly by US$1,200.

Many people joined this herd mentality of selling, which leads one to believe this was the reason behind the price dip.

 

What’s happened with bitcoin since then?

 

On 21st January, there were two reports revealing a critical flaw in the bitcoin blockchain network. I’ll reiterate that these statements were unconfirmed. These were only rumours.

Allegedly, people claimed that they were able to spend the same bitcoin twice.

This is known as a ‘double spend’.

It was believed that this issue was previously present when bitcoin was in the prototype stage. This bug was supposed to be resolved when bitcoin was officially released in 2009.

However, renewed rumours of a ‘double spend’ raised questions of bitcoin’s integrity. This created fear in the markets and spooked investors.

Fortunately, it didn’t last very long.

On 22nd January, Coindesk issued a detailed clarification. They said the ‘double spend’ had not happened.

Here was the actual scenario:

  • No new coins were actually added to the network.
  • The bitcoin transaction from one wallet was actually split into two different blocks.
  • This is called block reorganisation. It happens when mining pools mine the same block simultaneously, which can cause a split in the blockchain history.
  • Once the split happens, the two blocks have miners added on to them until one block wins out.
  • The final result? Only one bitcoin can ever be created in the end.
  • The integrity of bitcoin reportedly remains secure.

It’s quite an interesting journey that bitcoin has gone through within a time span of 28 days. It has swung wildly as the market corrected and adjusted. Its value stands today at around US$31,000.

Bitcoin is a speculative asset that has captured the imagination of both retail and institutional investors.

What does the future hold for bitcoin and other cryptocurrency? No one really knows for sure. But I’m fascinated to see what happens next.

 

Regards,

Alistair Bilkey

Analyst, Wealth Morning

(Disclaimer: This material is provided for as news and general information. It should not be construed as investment advice. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)

Important disclosures:

Alistair Bilkey trades Bitcoin (BTC).

 

PS: As part of our Vistafolio Wealth Management Service, we can invest in a cryptocurrency trust on request. This allocation strategy is part of a balanced portfolio which we professionally manage for Eligible and Wholesale clients. Click here to find out more.