Given the recent surge in both the price and media coverage of bitcoin, many investors are wondering whether the digital currency has reached its limit, or if there is additional room for upside.
Looking back to the last bitcoin bull market in 2017; are we closer in terms of price to August, when the value of bitcoin was a little over $4,000 – after which, the currency spent several months on an upward trajectory? Or, are we nearer to December, when the price reached its prior all-time high of more than $19,000, before declining?
Significant volatility in recent years
Those looking to invest in cryptocurrency saw that the price of bitcoin experienced sharp gains during 2020, rising from approximately $8,000 to end of the year near $30,000. During the new year, bitcoin value has continued to grow, hitting an all-time high of $41,826 in early January. This has left many investors wondering where we are in the current bull run.
In 2017, the price of bitcoin also experienced a dramatic surge, climbing from less than $1,000 to nearly $20,000, and, at one point, rising over 1,900%. Shortly after the end of 2017, the digital asset took a precipitous drop, falling by about 65% during the span of January, and wiping out billions in investor money.
At a quick glance, the investment environments seem similar, as both involve a substantial price increase over a short period of time. With this in mind, what other similarities are there?
Greater user interest in investment
The number of new users who decided to sign up for an account with eToro spiked during 2017. Another increase can be seen in March of 2020, as social restrictions and lockdowns, due to the effects of COVID-19, were being instituted. After falling back to average levels, new accounts once again spiked during the first week of January.
Source: eToro research. Data is from 1/1/2017 through 3/1/2021.
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Worldwide Google Trends
Another statistic often cited as a precursor to a drop in the bitcoin price, is Google Trends. For example, in 2017, bitcoin searches via Google hit record levels. While the recent spike has surpassed a three-year high, it is not yet near the levels seen in 2017.
Source: Google Trends
Other social media metrics are also pointing to an increase in retail interest, however, the numbers are not as high as they were in 2017. Per data provided by BitInfoCharts, Twitter mentions of bitcoin spiked in early January, but, still, numbers did not reach the levels of those in December 2017.
Source: Bitinfocharts, amount of tweets mentioning bitcoin from Jan 2017 to Jan 2021.
While retail investors are beginning to, once again, look at bitcoin; what are the differences between now and 2017? Firstly, it’s important to note that bitcoin is now 12 years old, and the average amount invested in the currency is larger.
The data below shows the difference in the average cryptoasset purchase for an eToro account between 2017 and 2020.
Source: eToro proprietary research. Data is from 1/1/2017 through 3/1/2021.
This shows that, when comparing the average amount invested in cryptoassets at the height of the 2017 market versus 2020/2021, the latter period is higher.
Major investors and PayPal facilitation are solidifying legitimacy
In 2017, the majority of people who invested in bitcoin were retail investors. In contrast, the 2020 market has seen an escalation in big-ticket purchases made by whales, or major investors. Data provided by Chainalysis shows that a surge of purchases involving over 1,000 bitcoin drove demand during the last few months of 2020.
Savvy buyers include institutions, big-name investors, and hedge funds, with names such as MicroStrategy, MassMutual, Paul Tudor Jones, and Square, investing large amounts in the cryptoasset.
A recent research report from JPMorgan stated that they have “little doubt that the institutional flow impulse into bitcoin is what distinguishes 2020 from 2017.”
Not only are there more Wall Street names buying bitcoin, but the announcement that PayPal would facilitate crypto purchases provides additional options for investors to buy and sell cryptoassets. PayPal cited “the increased interest in digital currencies by governments and consumers” when giving its customers the ability to make these transactions. The online payments giant also revealed that it aims to “significantly increase cryptocurrency’s utility by making it available as a funding source for purchases at its 26 million merchants worldwide.”
Another step in bitcoin’s mainstream adoption is Visa’s plans to offer bitcoin-related credit or debit cards.
So, what is drawing institutional investors to the digital asset at this time? It helps to take a look at the contrast in the economic background between 2017 and now.
Healthy GDP in 2017 contrasts with a tumultuous 2020
In 2017, the global economy was enjoying healthy growth. In fact, global GDP for 2017 grew by 3.14%. This was up from 2.51% in 2016 — a sharp comparison to 2020, where growth across the globe came to a standstill. The impacts of the coronavirus shut economies down, and unprecedented monetary stimulus took place.
According to The World Bank, the cost of these closures has come at a heavy blow to economic expansion, as the final growth rate for 2020 GDP is expected to be -4.3%.
In 2017, the U.S. Federal Reserve raised the Federal Funds rate three times, reflecting the improving economy and employment market. In contrast, central banks worldwide lowered rates to effectively zero in 2020 in an effort to stimulate growth.
The amount of money injected into the global economy during 2020 was staggering. Trillions of dollars of stimulus were handed out in the U.S. alone, and the Fed is continuing to purchase bonds, to the tune of $120 billion each month. Around the world, other central banks are providing similar relief, and debt has surpassed levels not seen since World War II.
All of this stimulus has had a detrimental effect on the U.S. dollar, which fell 6.3% in 2020, with further declines expected in 2021. The current environment is one of stagnant growth,
near-zero interest rates, and rising debt. So, how does bitcoin fit into this dynamic? With its limited supply, its scarcity provides an inherent value.
Bitcoin’s future is dependent on the balance between supply and demand
Bitcoin’s scarcity and appeal as an inflation hedge are what drives its value. The digital currency has a hard cap, so only 21 million units can ever exist. In the original “Bitcoin: A Peer to Peer Electronic Cash System,” Satoshi Nakomoto introduced the halving concept. Roughly every four years, the mining incentive will be cut by 50%.
When the reward for the miners is reduced, the rate of new supply of bitcoin is lowered by half – thus helping to keep a lid on inflation. If the demand for bitcoin grows more quickly than the supply, it will place upward pressure on prices.
Given bitcoin’s increased demand, scarcity, value as a hedge against inflation, and refined customer base, it is our view that bitcoin’s price still has more room to grow. There have been many predictions on the future price of bitcoin, with many calling for the currency to rise above $100,000 by the end of 2021. When asking the question of whether we are nearer in terms of price to August or December of 2017, it is our view that we are closer to August, and that, again, there is room for growth.
Bitcoin prices have frequently rallied following halvings, with the price having climbed sharply in the 12 to 18 months after both the first and second halving. Given that the third took place in May 2020, we believe the next peak could be around August 2021, with a price of approximately $85,000. Of course, it must be noted that understanding how to buy bitcoin and investing in cryptocurrency is a risky business, a crypto-asset markets are highly volatile and frequently suffer from low liquidity.
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