Bitcoin achieved a remarkable rise in 2020 despite many things that would normally make investors wary, including US-China tensions, Brexit, and, of course, an international pandemic. From a year-low on the daily charts of US$4,748 (£3,490) in the middle of March, as pandemic fears took hold, bitcoin rose to just below US$30,000 by the end of the year. Since then it has climbed to all-time highs above US$38,000, making headlines day after day and driving up the prices of other cryptocurrencies at the same time. This article lists the top reasons behind Bitcoin’s highest surge in price.
To further understand why Bitcoin has a verifiable finite limit to its quantity it is important to understand the mechanism built into its code known as the Halving. Every 210,000 blocks that are mined, or about every four years, the reward is given to miners for processing Bitcoin transactions is reduced in half.
In other words, Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation. The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are 18.5 million Bitcoins in circulation or about 88.4% of Bitcoin’s total supply.
With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.
Since Bitcoin’s inception, its price has followed extremely close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has crushed its previous all-time high.
Several institutions, both public and private, have been accumulating Bitcoin instead of holding cash in their treasuries. Recent investors include Square (SQ), MicroStrategy (MSTR), and most recently the insurance giant MassMutual, among many others. In total, 938,098 Bitcoin now valued at the time of writing at $19,450,247,760 has been purchased by companies, most of which has been accumulated this year. The largest accumulator has been from Grayscale’s Bitcoin Trust which now holds 546,544 Bitcoin.
Central banks and governments around the world are also now considering the potential of a central bank digital currency (CBDC). While these are not cryptocurrencies as they are not decentralized, and core control over supply and rules is in the hands of the banks or governments, they still show the government’s recognition of the necessity for a more advanced payment system than paper cash provides. This further lends merit to the concept of cryptocurrencies and their convenience in general.
From its initial primary use as a method to purchase drugs online to a new monetary medium that provides provable scarcity and ultimate transparency with its immutable ledger, Bitcoin has come a long way since its release in 2009. Even after the realization that Bitcoin’s and its blockchain tech could be used for way more than just the silk road, it was still near impossible for the average person to get involved in previous years. Wallets, keys, exchanges, the on-ramp were confusing and complicated.
Today, access is easier than ever. Licensed and regulated exchanges that are easy to use are abundant in the US. Custodial services from legacy financial institutions that people are used to are available for the less tech-savvy. Derivatives and blockchain-related ETFs allow those interested in investing but fearful of volatility to become involved. The number of places where Bitcoin and other cryptocurrencies are accepted as payment is growing rapidly.
Also, part of Bitcoin’s price appreciation can certainly be attributed to fears of inflation and its use as a hedge against it. With further money printing on the horizon from stimulus packages, as well as talks of student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store-of-value assets more compelling.