Bitcoin is back after more than doubling in less than a month, sparking debate about its value. The price of the digital currency last week rose above $40,000 for the first time. Since the commencement of the pandemic in March last year, the price has dropped by more than 700%, rising by approximately $5,000.
The headlines circling aren’t new to the 12-year-old cryptocurrency. Bitcoin has been here for the past decade, exploding with predictable outcomes. Similar to the 17th-century tulip craze, Bitcoin surged from under $1,000 in early 2017 to $20,000 in 12 months. Moreover, it plummeted to around $3,000 in the first few weeks of 2018.
Back then, central bankers and financiers, the most mainstream investors, saw it as a dangerous, unknown instrument for fraudsters and terrorists. It was warned that it would be a disaster for punters who were dragged in. One of the greatest commentators at that time was Jamie Dimon, the chief executive of JPMorgan. He evaluated it as a “fraud” that would blow up at any moment. In late 2017, he said in a conference that a person is stupid to buy it. As a result people more likely experience the consequences one day.
The total of existing bitcoins now is more than 18 million, which was generated by the miners. They also provide the computational power underpinning a digital ledger sustained by thousands of computers around the globe recording the transactions made using the currency, blockchain. A decentralized organization, such as a central bank, mathematically generates new bitcoins, with a hardwired maximum of 21 million coins.
Whoever chooses to “hodl“—or hold on to bitcoin, slang for its online supporters—is unlikely to see it explode. The chance of making America’s highest-paid banking executive blushed. As of today, the modest holding is worth more than $80,000. Dimon’s daughter was one of the owners who emailed Dimon after his “stupid” comment on her holding two bitcoins.
This time, Dimon and the rest of Wall Street are changing their minds. A growing number of large institutional investors, hedge funds, and retirement managers are buying their shares. But Dimon admitted that this wasn’t for him and that a lot of very smart people were getting involved.
Ruffer, a UK fund manager, was one of the financial elite’s supporters on Wall Street and in the City, which is known for bitcoin buyers. According to some analysts, there are three main factors affecting the bitcoin price. Firstly, the media hypes the digital currency, resulting in speculative buyers. Secondly, the inclusion of traditional money nourishes the market. And lastly, some stockholders are eyeing it for inflation protection.
The central banks are still pumping billions of pounds into the economy through quantitative easing. Expectations are rising for higher average consumer prices in hopes that a coronavirus vaccine will spur a rapid economic recovery. Inflation will erode the value of government-backed fiat currencies. This makes the digital currencies a potentially attractive proposition.
Bitcoin as Gold
Analysts at JP Morgan have said that if Bitcoin becomes as popular as gold, its value could soar up to $146,000. According to him, when comparing digital currencies to precious metals, Bitcoin’s value must more than quadruple to match the value of $2.7 trillion in gold held by individual investors. This means Bitcoin’s theoretical price is $146,000. However, according to analyst Nikolaos Panigirtzoglu, who wrote the study, the currency’s volatility must be much lower to match the perceived value of gold. The value of which establishes as worth owning for thousands of years.
He predicted that Bitcoin would likely peak in a year and then crash if it continued to rise. The speculative funds that are currently taking place are increasing the volatility of Bitcoin. In a sense, this actually delays the convergence with gold, a key component of sustainability. He wouldn’t be surprised if there were no corrections. How big this crystal is depends on how far it goes. When it reaches $100,000, the correction is likely to be large.
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