Bitcoin has struck gold but can the rally last?

By Kunal Sawhney (CEO, Kalkine Group)

Bitcoin’s dizzying rally during the pandemic year has now fast extended into 2021.

In the early hours of January 6, the cryptocurrency blasted past the US$35000-mark, climbing by 6% to surpass its previous high of US$34,792 on January 4.

The world’s most prominent digital currency quadrupled in value in 2020 and is quickly emerging as a rival to the best-known safe-haven – gold.

Bitcoin’s value has risen an astonishing 336% in one year, as opposed to the price of gold that increased by just 24% in the same period.

This unprecedented market rally for the 11-year-old digital currency took off in September 2020, soon after investors saw it as a hedge against the pandemic-induced inflation and the depreciating US dollar.

One-year returns of gold (Orange line) and bitcoin (purple line)/ Source: Refinitiv, Thomson Reuters.

This ongoing frenzy is primarily driven by millennials and the recent acceptance of the cryptocurrency by retail and institutional investors.

Many analysts are now calling bitcoin the new ‘digital gold’.

However, even though this ‘digital gold’ has posted higher returns than the traditional safe bullion, questions remain about its ability to function as a dependable currency or asset class.

Bitcoin & Volatility

Bitcoin’s rally has repeatedly been marked by volatility and inconsistency. Before hitting its all-time high on January 6, the digital currency plunged by nearly 17% on January 4 – its biggest intraday retreat since March 2020.

Going by the previous trends, this volatility might continue.

The digital coin had peaked to US$19,783 on December 17, 2017, only to fall by 45% in the next five days. It ultimately lost 65% of its value by February 2018.

Bitcoin has often displayed sharp price fluctuations, all pointing towards speculative bubbles.

In a world awash with monetary and fiscal stimulus, bitcoin is surprisingly low on liquidity that often induces price fluctuations.

Recent research by Glassnode, a blockchain data and intelligence platform, shows that nearly 14.5 million or 78% of Bitcoins circulating in the market are “illiquid” and barely accessible. Just 4.2 million bitcoins are in steady circulation.

FOMO investors pumping money into Bitcoins can lead to an unsustainable bubble. And all this is exacerbated by a regulatory environment that is yet to understand the full potential of blockchain and cryptocurrencies.

Investing in this currency could still be risky, given the chances of it entering a correctional zone.

More to Come for Bitcoin?

Given Bitcoin’s volatility, some investors may think it is time to exit. But its remarkable ascent in 2020 has stunned Wall Street.

Leading investment bank JPMorgan on January 5 forecasted that Bitcoin could hit as much as US$146,000 in the long term– nearly 317% higher than its current level.

It could go up against gold as an alternate currency. But to reach this level, the virtual currency’s market cap needs to grow at an astounding 4.6 times to match the US$2.7-trillion private sector gold investment.

The mainstream acceptance of the blockchain-backed currencies can further jack up this rally.

Top fintech platforms PayPal Holdings and Square are now betting big on cryptocurrencies.

PayPal will allow users trade to buy, sell, and hold cryptocurrencies on its platforms. Crypto exchange Coinbase has also privately filed for an initial public offering (IPO), hoping to capitalize on

The sustained growth of junior cryptocurrencies, such as Ether is also encouraging. Unlike Bitcoin, the native currency of Ethereum blockchain has been slowly ascending, without displaying much volatility. Ether breached US$1,100-mark on January 4, swelling by over 600% in one year.

The COVID-19 pandemic has also broadened the horizons of regulatory agencies and financial institutions.

A group of six major central banks of Britain, Canada, the Eurozone, Japan, Sweden and Switzerland – are mulling over launching their virtual currencies or CBDCs (central bank digital currency).

About Lisa Baker, Editor 2305 Articles
Lisa Baker is the Editor of Always Finance, and writes about Business, Finance Technology and Healthcare. Lisa is also the owner of Need to See IT Publishing.