Traditionally currencies have the backing of sovereignty of a state and they fluctuate according to the economic conditions prevailing in respective states. Bitcoin is a surprising development as it is not backed by any sovereign guarantee yet it has vaulted in value, with one now worth five times the amount one year ago. Last week Bitcoin enjoyed a record-breaking upsurge after electric carmaker Tesla and Wall Street finance giants sparked a gold-rush for the world’s most popular virtual currency but bubble fears persist.
There is hardly any doubt that investors and mega-corporations alike have been wooed by dizzying growth and the opportunity for profit and asset diversification. Bitcoin blasted past $50,000 following a week in which Tesla invested $1.5 billion in it and vowed customers could use it to buy vehicles and both New York bank BNY Mellon and credit card titan MasterCard announced plans to support Bitcoin. Bitcoin’s rise has been vertiginous as crypto-currency then vaulted higher topping $52,000 after investment fund giant BlackRock also confirmed a push into the booming sector. Yet the astonishing ascendancy of Bitcoin has sparked renewed fears of a big bubble which the market had last experienced four years ago.
US software firm MicroStrategy meanwhile announced plans to sell convertible bonds in order to buy more Bitcoin raising eyebrows in some quarters. The unit had previously hit the headlines in 2017 after soaring from less than $1,000 in January to almost $20,000 in December of the same year. The virtual bubble then burst with Bitcoin’s value then fluctuating wildly before sinking below $5,000 by October 2018. It is often commented that Bitcoin is an asset that is incredibly volatile and is very risky and the reports have been doing rounds for ten years that Bitcoin will collapse but it is still there and it is added that the unit’s volatility would decline as its popularity broadens.
Currently, one Bitcoin is currently worth five times more than a year earlier, while the combined value of all units in global circulation is almost $1 trillion. Industry professionals maintain however that Bitcoin is a new and ground-breaking financial unit of the future. It is however mentioned that Bitcoin will soon be added to the balance sheet of central banks as a number of central banks have indeed announced plans for bank-backed digital units but are highly skeptical over Bitcoin because of its shadowy nature and the fact that it remains unregulated.
On the other hand, European Central Bank President Christine Lagarde declared this month that Bitcoin was not a currency and was a highly speculative asset requiring global regulation. At the same time, Europe represents just ten per cent of Bitcoin purchases from investment funds. US companies have meanwhile been quicker than their European counterparts to embrace the unit. The difference between the US and Europe in that regard is the same with pretty much any kind of adapting to new technology as it always takes just a bit longer.
CoinMarketCap is valuing the crypto at around $1 trillion as Bitcoin has added more than $415 billion of value in 2021 alone. A report notes that Bitcoin kicked off 2020 at just over $7,000. Even a global pandemic could not suppress prices for too long as it broke the $20,000 ceiling just this past December as demand from institutional investors rapidly increased. Bitcoin touched a market capitalization of $1 trillion countering analyst warnings that it is an economic side show and a poor hedge against a fall in stock prices.
All digital coins combined have a market cap of around $1.7 trillion. Rival crypto-currency Ether also hit an all-time peak of $1,974.99 and was last up 1% at $1,958.76, after its futures were launched on the Chicago Mercantile Exchange. Bitcoin’s surge extended to crypto-related stocks as well, such as Silvergate Capital Corp, which was up 8.2%, crypto-currency miner Riot Blockchain, 13.5 higher% and Marathon Patent Group, up 7.3%.
Comparing crypto-currency with gold it is observed that the gold has a market cap $9 or $10 trillion. Even if Bitcoin gets to half of gold’s market cap, that is still growth of 4X, or $200,000. On this context, Bitcoin would need to rise to $146,000 in the long-term for its market cap to equal the total private-sector investment in gold via exchange-traded funds or bars and coins. For Bitcoin the next milestone will be overtaking Alphabet Inc, currently valued at $1.431 trillion though there is the ever-present likelihood of massive fluctuations yet the trends are very bullish and the uptrend will continue for the time being. Investors however showed their concern that Bitcoin’s volatility has become a hurdle for it to become a widespread means of payment.
However, not everyone is enamoured of Bitcoin as JPMorgan analysts called it an economic side show. They are skeptical of the patchily regulated, highly volatile digital asset, which is little used for commerce. They also mention that Bitcoin’s current prices were well above estimates of fair value. Mainstream adoption increases Bitcoin’s correlation with cyclical assets, which rise and fall with economic changes, in turn reducing benefits of diversifying into crypto. They conclude that Crypto assets continue to rank as the poorest hedge for major draw-downs in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed. Yet Bitcoin proponents argue the crypto-currency is digital gold that can hedge against the risk of inflation sparked by massive central bank and government stimulus packages designed to counter COVID-19. TW
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