Technology Sector

What's the Reason behind the Recent Surge in Bitcoin?

Taking a look into why the cryptocurrency has experienced such a meteoric rise in price over the last few months.

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4th January 2021, 17:00 GMT 

Bitcoin has seen a price increase that has dwarfed that of 2017 in the past few months, in September the price of Bitcoin hovered around the $11,400 whereas as of the 4th of January 2021 the price of Bitcoin is just under $31,000. This leaves the question of what is behind this recent and huge surge in the virtual peer to peer currency?

 

It ultimately comes down to Bitcoin slowly becoming more mainstream, along with the general rise in asset prices along with the cryptocurrency’s ability to combat against the growing fear of inflation as a result of the 21 million fixed Bitcoin that are available.

Bitcoin becoming Mainstream

The major reason that this recent rally in Bitcoin differs from that of 2017 is that rather than individual retail investors buying the cryptocurrency, now it is large institutional investors. This is huge for Bitcoin as previously these individual retail investors had limited funds, varying knowledge about Bitcoin and cryptocurrencies and the majority were ready to liquidate their investment for a quick profit. The majority of these retail investors throughout the 2017 surge were based out of Asia and were investing throughout the cryptocurrency industry, mainly through ICOs.

 

This time around, however, large institutional investors investing large amounts of capital into Bitcoin with the strategy of holding the cryptocurrency for the long-term. A major reason behind this change in attitude from institutions (mainly based in the US) is that the outlook towards holding cash in your treasury is slowly becoming frowned upon. Many publicly traded companies have begun converting their cash into Bitcoin. Examples include MicroStrategy Inc. who converted $425,000,000, Galaxy Digital Holdings who converted $134,000,000, and Square Inc. who bought $50,000,000.

 

This shift in many companies' view in Bitcoin is that by purchasing the cryptocurrency companies can strengthen their finances whilst being less threatened by poor macroeconomic performance and market swings, which many firms have become far more precautious about as a result of 2020.

 

It is not solely institutional investors that are furthering Bitcoin becoming mainstream but also institutional adoption. A prime example of which is PayPal who announced back in October that it would support cryptocurrency transactions. This enables the over 280 million PayPal users to slowly become familiar with cryptocurrencies.

 

JPMorgan is also an example of some of the major traditional Wall Street firms that are beginning to get involved within the cryptocurrency space by both providing research and investing towards the industry.

The Limited Supply of Bitcoin & Rise in Asset Prices

There are however a few other factors that must be considered when discussing the recent surge in Bitcoins price. The first being the general rise in asset prices across all industries, including stocks, commodities, and more.

 

This is as a result of the extremely low-interest rate that is available when borrowing money globally which has caused huge returns to be available on investments regardless of the industry. Thus, in general, all industries are currently receiving heavy investment and returning with higher prices, so some of Bitcoins' recent rise can most definitely be attributed to this.

 

The other reason that must be considered when analysing Bitcoin’s recent surge is the limited nature of the virtual currency, this can be seen as a way to protect against rising inflation rates due to Bitcoins decentralized nature and fixed amount.

 

This has become particularly important recently amid the COVID-19 pandemic and subsequent stimulus programs that have been enacted worldwide by governments.

 

This has resulted in many governments to heavily increase the supply of money into the economy, most notably in the US. Due to the fixed nature of Bitcoin, many people view the cryptocurrency as a way to confine the effects of inflation.

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