2020 was one of the worst years for all countries, as GDPs contracted more. This led to a financial crunch worldwide, but the stock market and cryptocurrencies told a different story.
As people sitting at home were finding other ways to earn money, they started investing in cryptocurrencies. Thus, cryptocurrencies brought the digital currency and stock markets to new heights. Bitcoin prices rose from 8,599 USD in February 2020 to 57,298 USD in March 2021, a massive jump in the market.
The massive price hike shows a surge of almost 400% in just one year of the COVID-19 global pandemic.
It is not the first time that Bitcoin has amazed the market with such a surge in price. Bitcoin was born in 2009, and its inventor is Satoshi Nakamoto. It is a decentralized trading system that works with blockchain technology. Bitcoin is extracted from the system when the miners solve highly complicated math problems.
Bitcoin: A Futuristic Gold
The Bitcoin networks reward the miners by circulating new bitcoins in the system. These rewards are halved after 210,000 blocks or every four years.
Bitcoin is different from traditional client-server computing systems. Its peer-to-peer network enables clients to connect directly instead of with a centralized server. This system eliminates redundancy and the need for a third party to verify the transactions.
These systems help the miner; if one node closes down, others can work on their systems, making it a versatile network.
Bitcoin is a cryptocurrency that has attracted new digital currencies into the market, like Ethereum, Ripple XRP, Litecoin, etc., and it still captures a market share of 69%. The funds that Tom Lee states that bitcoin may quadruple in 2021, similar to the effect in 2017.
He added that 2021 would be more like 2017 in Bitcoin, as if the prices multiplied by four, they could reach the $ 100,000 mark. These facts are becoming apparent as the cost of Bitcoin goes to the next level, almost touching the mark of $60,000.
The above facts might make you curious about how these prices are at their peak and why bitcoins are becoming digital gold. This article will explain the specific factors behind the increasing prices of bitcoin.
Reason 1: Adaptation by various Institutes
Many organizations consider cryptocurrency, especially bitcoin, a haven against market fluctuations and inflations. The current economic market scenario makes people cashless and cautious about market swings. Many companies are converting their cash funds into cryptocurrency. Even Tesla has bought bitcoins for around 1.5 billion dollars. Other companies like Square, the American payments firm, have bought bitcoins worth 50 million dollars, and US-based public company Microstrategy has also converted its 425 million dollar cash into cryptocurrency. Bitcoin is gaining corporate investors’ confidence because of its increasing value as it considers a better way to store the value.
Reason 2: Paypal Investment
Last year in October, Paypal, the global giant online payment platform, announced that it was upgrading the feature of buying and selling cryptocurrency. The company opened itself to four majorly traded cryptocurrencies, including bitcoin. Paypal has a user strength of 350 million, who can now make payments using Bitcoin, and 30 million merchants can now accept payments in digital currency. This organization is the first critic to support cryptocurrency and named it a sustainable currency. Through it, people will demand more for the asset class, ultimately raising the price.
Private investors are adopting bitcoins, and some countries’ governments also favor using cryptocurrencies in their economies. Countries like Germany, Japan, the USA, etc., are taking a positive stance on cryptocurrency.
Reason 3: A halving of Bitcoin is creating scarcity
Every good thing has some limitations; the same applies to Bitcoin. This year, the third halving of Bitcoin occurred. Bitcoin Halving is an important event that happens every four years or when 210000 blocks get covered. Bitcoin Mining extracts Bitcoin from the networks when miners solve or verify transactions in ten minutes. The system rewards the miners with Bitcoin for accomplishing the task. Present-day, the rewards stand for 6.25 BTC per valid block mining. Halving the reward value by 50% every four years reduces the reward value.
Halving Bitcoin is a critical factor in raising the price, as it doubles the supply ratio, i.e., “Stock to flow ratio = total currency available: total currency into circulation.” As only 21 billion bitcoins are in the system, the halving of currency decreases market circulation. As people become aware of the importance of digital currency and its scarcity, demand is also shooting up, raising the price.
Reason 4: Getting Recognition
Cryptocurrency can serve both purposes, such as storing value and acting as a mode of exchange. As people gain trust, they want to convert their money into digital currency, as it is a better source of value storage. Over the years, bitcoin has earned a reputation as a new asset class, and people want to invest in it as it is a deflationary and less risky investment.
After RBI lifted the ban on cryptocurrency regulation, a significant rise in Bitcoin investors was noticed. Due to this increased investment, many platforms have introduced features for trading Bitcoin in their applications, making investors invest more in these sites.
Circulation of Bitcoin
Today, as many people are suffering from a financial crunch and finding new ways to earn money, up to 82% buy Bitcoin, and only 18% sell it back to the market to earn profits. Today, just 20 million bitcoins are circulating with an 800 million market capitalization value. Such facts make bitcoin a more liquid asset than other cryptocurrencies.
Bitcoin is a lucrative asset that can be easily transferred with minimal charges. While banks have lengthy procedures for transferring funds, contracts through Bitcoin funds can be transferred without formalities, making it preferable for people. Similarly, in UC Berkeley, California, there are Bitcoin ATMs where people can transfer funds hassle-free.
Uncertain Future Aspects of Bitcoin
Law of Diversification
Bitcoin is scary, and only 21 billion coins are available online. With time, its rewards also decrease in the heart. It may also hurt the financial market. Hence, we should work on the law of diversification.
The law of diversification means that, in addition to focusing on investing in Bitcoin, we should also invest in other cryptocurrencies to balance losses with the profits of different digital currencies. For example, in November, the Bitcoin price rose to $40000 but suddenly declined to $10000, and as the price started to rise again, the market also got interesting.
Competition next door
Although Bitcoin is gold and Ethereum is more of a platform for decentralized apps, Ethereum is still the most significant competitor. Ethereum was a young chap when it was introduced to the market.
People got attracted to it because it proved to be more than a cryptocurrency. It included a well-designed trading system where anything and everything of the same value could trade.
However, the infamous forking of the Ethereum chain and diverging it into Ethereum and Ethereum Classic caused the value of Bitcoin to rise again, as trust in Ethereum again shifted to Bitcoin, and the value of virtual gold soared higher than before.
Maximizing Black money
The unaccounted cash could be translated to Bitcoin. Once Bitcoin’s value increases, the unaccounted equivalent of Bitcoin could double or triple. When Bitcoin is converted back to its original currency, it will increase that nation’s black money.
Potential Threat
India has the second-largest population globally, and it is in talks about launching its new cryptocurrency and legalizing some of the existing virtual currencies. It will disturb the cryptocurrency market’s current equilibrium and devalue Bitcoin due to the Indian populace using its virtual currency.
Conclusion
Bitcoin is a lucrative asset that can double your wealth. With a limited supply, it is becoming a scarce currency, making it more valuable with rising prices. JP Morgan, the financial investment firm, stated that Bitcoin would be the future gold.
As there is no regulation on such currencies, Bitcoin’s inventor can build a backdoor into the cryptocurrency system, destroy the whole system, or encash all bitcoins.