Bitcoin, the world’s biggest cryptocurrency has to lead a rally of the digital assets that have seen it reach it’s highest levels in 3 years. Reaching a peak this year of 19300 before taking a slight dip to just below that eyebrows have been raised again. Backers and cryptocurrency enthusiasts have been buoyed by this and murmurs of Bitcoin being able to reach over 100000 in the year 2021 are rife. We need to understand the structure of Bitcoin, the reasons behind the current rally and why there is such optimism.
Bitcoin and cryptocurrency
If you don’t understand cryptocurrency or it’s workings there is an analogy I like to use. `Many of you are familiar with pool tables or mini soccer (slug) tables and the way they are token operated. You buy tokens and use tokens in these machines. Consider that token to represent a cryptocurrency. A token is worth a game in the machine. Now imagine a structure that allows tokens to be accepted in more than one pool hall. Imagine buying a token in Mutare and being able to use it on pool tables across the country or the world. That makes the tokens more desirable. If you were the sole manufacturer of these tokens you could charge more for them. Now let’s imagine a deal is struck where people can pay for food and beverages with these tokens. This again makes them more valuable. If you as sole supplier decide to produce less of these tokens annually, so reducing the supply of new tokens it’s probable their value will increase. To complete the analogy let’s make these tokens digital rather than physical. If you have managed to understand that you not only understand cryptocurrency but also understand the reasons behind its recent surge.
Why is it rallying?
There are 4 main reasons behind the current rally of Bitcoin. These reasons are not limited to Bitcoin but are the same reasons behind the rise of other cryptocurrencies. Wider acceptance in payments, institutional acceptance, higher concentration among holders and a recent halving are the reasons behind the rally. Let’s look at each one.
PayPal opens up to cryptocurrency
PayPal announced that in 2021 they will allow users to complete payments in cryptocurrency and this is similar to the acceptance of our analogous tokens being accepted for food and beverages. PayPal is huge in payments with 346 million registered active users in 2020. The prospect of cryptocurrencies moving to a payment solution in less obscure circles will certainly buoy the value. It also helps fix the trust deficit cryptocurrencies continue to experience.
The US Federal Reserve Chairman Jerome Powell endorsed digital currency, saying that there might be benefits to a digital version of the U.S. dollar, speaking at a virtual event hosted by the International Monetary Fund. The Federal Reserve was among many banks that jointly released a blueprint for the future of digital currencies just weeks ago. Other big names like Square (another payments provider) and Microsystems have invested millions in Bitcoin, US$500 million to be exact. With big names in finance and investing warming up to investing in digital assets, a rise is inevitable. Bitcoin is up 78% year to date where traditional haven asset gold is only up 27%. This doesn’t necessarily make Bitcoin better than gold as gold has intrinsic value (a real-world value outside the markets). But bitcoin is certainly performing better than gold. Closer to home we have seen our own Reserve Bank talk about how they want to work with cryptocurrencies.
More large accounts 1k plus
This wasn’t covered in our analogy but it’s pretty easy to make sense of. There has been a marked increase in the number of whale accounts of bitcoin. Whale accounts are accounts that hold more than 1000 bitcoin (roughly over US$18 million per account). There are over 2200 of these accounts on record, more than ever before. This sort of concentration solidifies Bitcoin as a target of high net worth individuals and not just a thing for enthusiasts.
In May 2020 there was a halving in Bitcoin. A halving can be best understood as the reduction (by half) of the number of coins miners are paid. Miners are the people who create the tokens in our analogy. So the halving affects the supply of additional cryptocurrency to the existing batch. By this, we can see the price pressure comes from both supply and demand sides. Bitcoin started 2020 at $7177.36. In March the coronavirus pandemic related slow down cut it down to US$4857.10 in just 3 days. Towards the May halving it firmed to around the mid 9000s and settled around the 11000s until mid-October. From there, it has rallied to current levels.
The future is bright, according to analysts
In recent months analysts have come out with predictions of Bitcoin being able to hit the US$150000 mark or higher in 2021. These are not predictions we haven’t heard before and we know how that went. However, the chorus is growing amongst respected voices. Some say as much US$300000 is possible. All confidence-inspiring but it is currently struggling to surpass the 2018 established resistance level and the peak of US$20000.