The value of popular digital currency Bitcoin has been touching new highs every day as many favourable investors are betting big on the cryptocurrency to become a mainstream asset. Bitcoin recently topped $34,000 (Over Rs 25 lakh) and cryptocurrency experts believe that the digital currency will rise further in 2021.
But as the value of Bitcoin rises, it seems to have triggered a parallel debate between the Bitcoin bulls and bears. While the bulls predict Bitcoin is to become an acceptable asset, the bears remind how volatile the digital coin has been in the past.
Bitcoin, known for its volatility, has bounced back strongly in 2020 after it suffered a severe crash in 2018. Since mid-March last year, the digital currency has surged roughly 800 per cent.
So, why is the controversial digital coin’s value surging so rapidly? Here are a few probable reasons
Popularity during pandemic
The popularity of Bitcoin, which suffered a huge blow in 2018 and was dormant for most parts of 2019, suddenly started picking up pace during 2020, also termed by IMF as the year of the “Great Lockdown”.
During the year, the Covid-19 pandemic battered economies around the globe, its rampage forced the entire world to impose strict lockdowns. The impact of the subsequent factors also had devastating consequences on the world economy and all kinds of mainstream investments and assets took a big blow.
Growing fears among investors regarding traditional assets created a perfect environment for Bitcoin revival. The currency that was written off by experts a few years ago took a complete U-turn and surged as many bid brand investors and companies stockpiled the digital currency.
Cryptocurrency experts have said that more global investment portfolios are now embracing the digital coin as an alternative asset to traditional ones like equities, gold and money. Antoni Trenchev, managing partner and co-founder of Nexo in London, told Bloomberg that Bitcoin is now expanded beyond the circle of “tech geeks” and speculators.
Global investment bank and financial services provided JP Morgan Chase and Co has said that in the long-term, Bitcoin’s value may see a sharp rise, provided volatility remains under control.
An alternative asset during the pandemic
As investors rushed to secure their money in safe havens like gold during the pandemic, some opted to bet on the less conventional Bitcoin.
Both classes of investors gained. However, those who risked their money on Bitcoin were rewarded handsomely, four times higher than what gold investors gained.
An increasing number of global investors are contemplating investing in the digital coin instead of gold. However, such a development is likely to occur over a longer period, considering the large market capitalisation of gold.
The limited quantity of Bitcoin in circulation is another likely reason behind the craze cryptocurrency is currently witnessing. It may be noted that the supply of Bitcoin is limited to 21 million; 18 million of them have already been mined and in circulation.
Since the supply of Bitcoin cannot be increased, its value was unaffected during the coronavirus pandemic, unlike traditional currencies which fell due to more money-printing. Although it is known for its wild fluctuations, its value rose steadily in 2020 and observed less volatility.
While those in favour of investing in Bitcoin disagree, many experts fear that it could be another bubble in the making for the volatile digital currency, which had witnessed another exponential rise in 2017.
In the following year, Bitcoin crashed sharply and a frenzied sell-off followed. In just a month, the value of Bitcoin plummeted 65 per cent and the digital currency’s market capitalisation had fallen below $100 billion in October 2017. Even on Monday, the value of Bitcoin fell sharply by over $4,000 or 17 per cent, reminding investors of its volatile nature.
As the debate on Bitcoin’s future potential continues, only time will tell whether the cryptocurrency becomes a more acceptable asset in future.