People may discuss the short-term volatility of cryptocurrencies all they like. One thing is clear, however: Bitcoin has been absolutely booming across a medium to long-term timeframe. 2021 has been especially successful. The primary cryptocurrency recently reached an all-time high, and its market cap has since surpassed $1.1 trillion. Before this year, Bitcoin was yet […]
People may discuss the short-term volatility of cryptocurrencies all they like. One thing is clear, however: Bitcoin has been absolutely booming across a medium to long-term timeframe.
2021 has been especially successful. The primary cryptocurrency recently reached an all-time high, and its market cap has since surpassed $1.1 trillion. Before this year, Bitcoin was yet to touch even half of that value.
So what changed? As always, there are hardly ever straightforward answers to such questions. Explanations are always somewhat speculative, and it’s difficult to infer direct causation between Bitcoin’s price and any particular event. But by reviewing patterns, events, and data from this year, we may find some method in the madness of its price.
Here are three reasons why Bitcoin’s price may be surging right now.
The Four Year Halving Cycle
One can hardly mention Bitcoin’s price without contextualizing it within its broader history. After all, Bitcoin has had a habit of surging in price every four years since 2009 – and 2021 is no exception.
This is by no means a coincidence. In fact, the boom cycle is almost directly related to Bitcoin’s monetary policy. Every four years, the reward attached to each Bitcoin block mined is cut by 50%. For example, from January 2009 to November 2012, successful miners received 50 bitcoin for mining each block. This reward decreased to 25 bitcoin until July of 2016, when it was reduced again to 12.5 bitcoin. The latest halving occurred in May of 2020, slashing rewards to just 6.25 BTC per block.
This block reward is not just an incentive to mine, but also the only method by which bitcoin enters circulation. Therefore, permanently reducing these rewards has a direct impact on the number of actively circulating bitcoin. With decreased supply and otherwise unchanged demand, the value of each bitcoin naturally rises.
Similarly, the halving causes the same number of miners to compete for a decreasing amount of bitcoin. With rewards cut in half, mining institutions must sell their bitcoin at increasing prices over time in order to cover their costs.
In any case, Bitcoin’s price went famously parabolic in both 2013 and 2017 – years directly following block reward reductions. In 2021, we are observing a similar phenomenon, following the halving of May 2020. There’s a clear connection to draw here, which also suggests that this year’s best is yet to come.
It’s easy for crypto fans to be impatient or annoyed by regulators, which often stand in the way of industry developments. Coinbase CEO Brian Armstrong has bashed the Securities and Exchange Commission for being difficult to work with on this front. However slow, regulatory progress and government acceptance are moving forwards in the blockchain industry.
For example, the SEC finally approved a Bitcoin ETF for trade in the United States this month. Though merely a futures ETF, it has provided an opening for institutions to invest in crypto which otherwise could not. In fact, the ETF saw the second most successful opening day in NYSE history, trading nearly $1 billion in volume. Since then, the Valkyrie and VanEck Bitcoin ETFs have also launched.
Regulations are getting clearer in other areas as well. Both the Federal Reserve and SEC chairman have confirmed that they have no intention to ban cryptocurrency. Even Vladimir Putin has shown openness to the asset class.
That isn’t to say every governmental body has been welcoming to all aspects of the industry. What’s important however is that conversations around crypto and clarity on its rules continue to grow. With clarity and investor protections comes consumer and investor confidence to invest in Bitcoin. This brings us to our last point:
Institutional buyers are flooding into Bitcoin at an unprecedented rate, looking for exposure to the asset. Of course, the massive buying power these institutions possess is itself a catalyst for increasing bitcoin’s price.
Tesla famously purchased $1.5 billion in bitcoin this February, which preceded two months of unprecedented highs for the currency. Microstrategy has also accumulated vast amounts of bitcoin in slightly smaller increments throughout the year. At this point, Michael Saylor’s company alone is estimated to hold at least 100 000 bitcoin.
Other wealthy groups including pension funds and mysterious whales are getting involved too. JP Morgan suspects that institutions are being driven to the asset in search of an inflation hedge. Bitcoin is currently preferred as a store of value over gold, including by billionaire hedge fund manager Paul Tudor Jones.
What’s especially important about these groups’ involvement is their relatively long-term commitment to the asset. Even through massive price fluctuations, both Tesla and MicroStrategy have sold only fractions of their bitcoin holdings. The bitcoin supply being HODL’d is currently at the highest percentage it’s ever been, showing the strength of investors’ hands. Naturally, this means bitcoin is coming off of exchanges and outside of available supply. This makes it even more of a ‘scarce’ asset, increasing its price further.
There are likely other factors worth mentioning that are causing bitcoin’s price to surge. But the halving cycle, regulatory progress, and institutional HODLers are definitely contributors.
Bitcoin is trading just short of $59 thousand at the time of writing. Meanwhile, the excitement continues to build in the crypto space for what prices we may see in months to come. Based on bitcoin’s history and current variables, we could see it surge well above $100 thousand by 2022.