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Why is the price of Bitcoin rising?
Over the past few weeks, the price of Bitcoin seems to continue to rise. But what is driving this growth? It turns out that there are a wide range of factors that continue to drive the value of Bitcoin higher.
Key points
- Bitcoin has broken a key resistance level, leading investors to believe that further upside is in the cards.
- Rising inflation and the possibility of further stimulus continue to push people into safe-haven assets.
- The growing adoption of payment applications like PayPal will allow many more people to easily access cryptocurrencies.
- Publicly traded companies that buy Bitcoin demonstrate a high level of confidence in its appreciation.
- Bitcoin’s historical tendency to closely follow its stock-to-flow halving pattern shows an ambitious and extremely bullish outlook.
Previous resistance
Bitcoin has seen extremely volatile peaks and valleys over time. Its last peak was near $14,000 in June 2019. At this point, Bitcoin has experienced a severe resistence and failed to get past this stage.
Had Bitcoin broken through that resistance in June, it would likely have sparked a bull market. Unfortunately for Bitcoin bulls, it failed to do so and fell to a low of nearly $3,800.
In October, Bitcoin retested this resistance point only to fall back. On November 4, Bitcoin pushed straight through $14,000 and continued to rise. This is significant because Bitcoin’s next resistance point is its previous all-time high of $20,000.
Since Bitcoin no longer has a theoretical resistance point until its previous all-time high of $20,000, many investors have become bullish that the cryptocurrency will be able to retest that price point or even break it. This speculation has led to a surge in the value of Bitcoin.
Inflation and the rush to safe haven assets
Another reason for Bitcoin’s rise is the rising inflation of the US dollar. While inflation averages 2% annually, the recent stimulus spending is set to significantly increase the level of inflation and decrease the purchasing power of the dollar.
With the recent stimulus packages, the United States has added about $2.4 trillion to the economy. This has caused many to worry about the inevitable decline in the purchasing power of the dollar and rising inflation.
https://fred.stlouisfed.org/series/M1.
To protect themselves from this rising inflation, many have withdrawn from the dollar and taken refuge in assets that have historically held value or even increased in value. Typically, the assets that people convert their dollars into to avoid inflation or volatile markets are those that are rare or are less volatile overall. These ‘refugeThese assets include precious metals, stocks in generally less volatile sectors, and, most recently, Bitcoin.
Adoption as a means of payment
Another reason for the appreciation of Bitcoin’s price is its increasing adoption as a payment method. Recently, PayPal (PYPL) has announced that it will soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as payment.
This news immediately sent the price of Bitcoin soaring. PayPal has nearly 350 million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also has well over 20 million active merchants who can now accept the currency.
Beyond PayPal, this has additional implications. PayPal also owns the wildly popular payment app Venmo. Venmo has over 40 million active accounts, making the accessibility of Bitcoin and other cryptocurrencies even more significant.
While PayPal and Venmo are newer to the cryptocurrency world, there are a number of other applications that allow their users to buy, sell, and hold. PayPal and Venmo’s most popular competitors, Square (square) and CashApp also accept cryptocurrencies, making Bitcoin’s audience even wider.
Institutional Investments
As discussed above, there is a growing narrative of Bitcoin as a safe haven. In the current social and economic climate, there is a growing incentive to hold less cash and hedge against wild market swings.
Recently, there has been a trend where publicly traded companies have started to convert cash in their treasuries into Bitcoin as a more robust store of value. Most notably, MicroStrategy, a business analytics firm, converted $425 million of cash in its treasury into Bitcoin. Shortly after, payments company Square made a $50 million purchase.
Since then, several companies have followed suit. The trust that these companies and their investors have in Bitcoin has given greater credence to the concept of Bitcoin as a store of value and safe haven.
Halving and Stock-to-Flow Model
Perhaps the most important reasons for the rise in the price of Bitcoin are two intrinsic features of its design.
First, there will only be 21 million Bitcoins that will ever exist. There will be no more or less, and this number will always remain static. This makes bitcoin rarer than anything that has come before. Other scarce assets are not 100% finite, and in some cases can be synthetically manufactured.
The second is a process encoded in Bitcoin called halving. In essence, Bitcoin has its own built-in system escrow mechanism in which Bitcoin is released and given to miners as a reward for processing transactions. This reward is halved every four years.
In this way, Bitcoin’s inflation rate is halved with each halving, and its stock-to-flow ratio doubles with each halving. This process continues every four years until all the Bitcoins in this escrow mechanism are released into circulation. From that point on, the Bitcoins in circulation will be limited to 21 million. As of this writing, there are 18,534,818 in circulation.
So far, the price of Bitcoin has closely followed its stock-to-flow ratio, and if it continues on this trajectory, Bitcoin could be worth around $100,000 by the end of 2021.
Italian: https://digitalik.net/btc/.
Increase in production costs
Another reason for the rise of Bitcoin is that as the size of the mining network increases, the difficulty of mining also increases, which in turn, increases marginal cost to produce a bitcoin. Bitcoin mining requires a large amount of energy, and this has a real cost that must be paid by miners in their local currency. Since the Bitcoin protocol requires that a block be found, on average, every ten minutes, more hashing power directed at mining does not increase the rate of new supply, but only increases the difficulty of mining. Research has shown The price of bitcoin has closely followed its marginal cost of production.
Cryptocurrency Performance for 2020
2020 Returns –
- Bitcoin (BTC): +111.66%
- Ethereal (ETH): +228.28%
- Ripple (Exchange rate risk): +28.90%
- Bitcoin Cash (BCH): +31.91%
- S&P 500 Index : +8.35%
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