Can Bitcoin continue its amazing bull run?
It is the obvious question after the world’s best-known cryptocurrency tripled in value since September last year and flew straight through the US$30,000 (A$45,410) mark.
The obvious answer to the obvious question is that nobody knows, otherwise we’d all be spending money instead of working out how to make more.
That being said, the same factors that pushed Bitcoin to its latest price peak are still very much in operation – with the obvious caveat that Bitcoin has also shown it can be extremely volatile after it collapsed in value following its impressive 2017 surge.
Scarcity value and new investors pushing price higher
In summary, those main factors are scarcity value, a search for returns, inflows of money from institutional and private investors and changed economic conditions for speculative investments due to the pandemic induced money printing by central banks.
Some of these factors are obviously inter-related, with the dramatic central bank money printing exercise also helping to create the search for greater returns away from more conventional investment classes and the related inflows into cryptocurrencies.
Others, however, are a matter of design with Bitcoin being a fairly rare example of a “currency’’ that is entirely disciplined, with a set of rules that it will not deviate from – with the most important being the rarity value of Bitcoin.
Number of coins capped
There will only ever be 21 million virtual “Bitcoins” in existence, which gives Bitcoin a strong scarcity value.
Even gold and other precious metals are subject to pricing pressures – if the price goes high enough, production from what used to be sub-economic mines can go ahead.
Bitcoin is not like that because no matter how high the price goes, the supply is limited to 21 million, which is why some crypto uber-bulls are saying that the price could one day reach unimagined heights.
$100,000 here we come?
“It’s very likely that the asset will eventually pass $US100,000 per coin,” claimed Sergey Nazarov, co-founder of Chainlink, in an email.
Of course, you would expect that from the leader of a global blockchain project but he has his reasons.
“People have been steadily losing faith in their government currencies for years, and the monetary policies resulting from the economic impact of the coronavirus have only accelerated this decline.”
The point is well made that with the US Fed pushing low rates and ignoring the potential for inflation at the moment, there is every potential for the purchasing power of the US dollar to decline.
Writing stimulus cheques – effectively paying money for no work – can also diminish the purchasing power of currency.
Currency purchasing power can fall
At other times in history when the purchasing power of currency fell – such as the 1970’s when inflation was high – it can be a good investment option to hold real assets such as gold, commodities, real estate and shares.
If cryptocurrencies had been around then, perhaps their prices would have boomed as well.
There are counter arguments to this sort of blue-sky thinking, the main one being that Bitcoin is not a productive asset.
That means that it has no underlying value to fall back on should hard times hit.
If share prices fall, many companies will still pay a dividend so there is still some basic value for holding the share.
Bitcoin doesn’t pay dividends
Bitcoin doesn’t pay any dividend so it has no intrinsic value.
In which case, the scarcity value can dissipate and unlike gold, negative price pressure won’t decrease supply through less exploration and production.
Bitcoin or any other cryptocurrency can quickly swing from scarcity to overproduction if it is no longer seen as valuable by investors.
Such negative thinking is of course out of place during a roaring bull market, which is certainly what Bitcoin is in after more than tripling in 2020 and growing 50% since it passed US$20,000 just a few weeks ago.
New central bank on the scene?
Bitcoin could be on its way to becoming a global mainstream payment method, one that appreciates in value as a form of interest compared to currencies.
If that is the case – and it would be a brave pundit who argued against it – then perhaps we are witnessing the formation of the world’s most disciplined central bank and a currency whose purchasing power remains on the rise even while many others are declining.