Bitcoin is on everybody’s lips once again as it comes closer to making a new all-time high. The cryptocurrency is the best-performing asset of the year so far, currently trading above the $18,000 level and close to the magical $20,000.
What is interesting is the price of Bitcoin’s evolution is that it decoupled entirely from gold. Both assets were viewed as reflecting investors’ need for safe-haven assets during the pandemic. However, by the time the positive vaccine news came out from Pfizer and BioNTech, Moderna, and today, AstraZeneca, gold tanked, but Bitcoin did not.
So, what drives the bullish price action on Bitcoin?
Who Is Buying Bitcoin?
We do know what triggered the move higher on Bitcoin – strong institutional investors buying at the $10,000 level. MicroStrategy, a US-based public company and Square, announced massive investments in Bitcoin when the cryptocurrency traded around $10,000.
But the real spark higher came after PayPal’s announcement that it will allow cryptocurrencies on its online payments platform. From that moment on, the price of Bitcoin did not correct anymore. It is said that the increase in the itBit platform volume implies that only after one month from the announcement, PayPal buying volume reached over 60% of the new supply of Bitcoin.
Also, there is an increasing number of institutional investors that start talking about shifting from gold to Bitcoin. One of the main reasons why investors buy gold is the fact that it offers a store of value. Nowadays, Bitcoin is seen as a store of value too, because it has a limited number of coins – 21 million.
While it is easy to get excited about such advances, one should not forget that Bitcoin also declines. In fact, even this year, it posted a drawdown of over 60% before recovering the ground. Therefore, if investors are willing to take the risk that at some point in time, Bitcoin may halve its price, then Bitcoin and other cryptocurrencies have a future.
This is one of the main critics against investing in Bitcoin – it is not a unit of account, and its volatility is too high to be considered money. Nevertheless, 2020 so far shows strong performance on Bitcoin and other cryptocurrencies, to the delight of long-term holders.
Will this price action continue? As long as demand outpaces supply, it may very well be the case.
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