11/24/2020 Alex Kondratyuk
#Google Trends#MicroStrategy#PayPal#gold#institutions#halving#Bitcoin price
2020 turned out to be not only rich in turmoil, but also extremely successful for Bitcoin investors. Fueled by global uncertainty, turbulence in financial markets and devaluations, the price of the first cryptocurrency approached the December 2022 levels.
The 2022 rally is significantly different from the previous one. In this article, ForkLog magazine will shed light on the most likely reasons for the current growth.
- The current Bitcoin rally only visually resembles the trajectory of the events of 2022, but is significantly different in the context of fundamental factors.
- Institutional interest in the first cryptocurrency is growing, which is manifested in the volume of investments, the emergence of new large market participants and activity on regulated exchanges.
- The rhetoric surrounding Bitcoin has improved significantly, with more opinion leaders talking about Bitcoin as a defensive asset and store of value.
Contrary to Google Trends
Since the beginning of the year, digital gold has grown by 158% - from just above $7,000 to $18,550 (as of November 22). Over the same period, the price of gold rose by 23%, while the S&P 500 index rose by only 10%.
Growth dynamics of Bitcoin (candlestick chart), gold (yellow line) and S&P 500 (purple line) since the beginning of the year. Messari data as of November 22.
At the time of writing, the price of the first cryptocurrency is only 6.85% below the historical maximum recorded almost three years ago at $20,089.
Data: Messari.
Bitcoin's price trajectory is very reminiscent of the 2017 rally, when a large part of the community was obsessed with ICO fever. At that time, the market infrastructure was not ready for institutional money, and the head of JPMorgan, Jamie Dimon, called the first cryptocurrency a “fraud” and threatened to fire “stupid crypto traders.”
At the end of 2022, when Bitcoin was at similar highs, the Google Trends trend for the search query 'bitcoin' was five times higher than it is now.
The price of any asset rises if demand exceeds supply. The graph above is evidence that the current growth is not only driven by ordinary users.
Government influence
News of new regulations or laws affecting the crypto industry is one of the fastest ways to influence the rate, since the market is not regulated by any country's government.
Regulations of any government can affect the value of cryptocurrencies, so even if the law is not passed in your country of residence, it can still cause a spike in volatility.
China is a country that follows all the developments related to the crypto world, as a large part of the cryptocurrency mining operations takes place in this country due to cheap electricity and labor costs.
At the beginning of 2022, rumors emerged that China was considering a ban on the development of cryptocurrency funds due to the huge electricity consumption, which negatively affects the exchange rate.
China has denied the rumors by saying that they have no plans to ban Bitcoin mining, but the market has definitely responded to the rumors and the Chinese government's response to them.
Halving life-giving
The Bitcoin protocol includes a twofold decrease in the rate of emission of coins received by miners every four years. The latest halving made the first cryptocurrency even more scarce, especially against the backdrop of many fiat currencies depreciating due to unprecedented monetary and fiscal measures by the authorities.
The strictly limited supply of Bitcoin and the regular decrease in the rate of its emission creates the preconditions for the long-term growth of the cryptocurrency, subject to constant or increasing demand for it.
Against the backdrop of global uncertainty and falling confidence in traditional markets, generously pumped up by depreciating fiat currencies, Bitcoin has become attractive to large investors who prefer a long-term investment horizon.
This thesis is confirmed by the results of the Chainalysis study. The company’s analysts recalled that miners only have 3.4 million BTC left to produce. 77% of already mined and not lost coins (14.8 million BTC) are stored in “illiquid” wallets, from which on average less than a quarter of the received assets are lost.
Since reaching a price record in 2022, the number of bitcoins in so-called “investor wallets” has increased by almost 3 million.
Over the same period, on the wallets of traders, which are characterized by increased liquidity, this indicator, on the contrary, decreased. Chainalysis believes that market speculators provide an offering for “new investors.”
Experts found confirmation of the involvement of institutional investors in the increase in the number of large transfers from exchanges. Data: Chainalysis.
Analysts identified institutional investors and corporations as long-term holders of the first cryptocurrency. They pointed to acquisitions by Paul Tudor Jones, Square and MicroStrategy. For such buyers, Bitcoin is an insurance against inflation and other troubling trends in the economy.
Chainalysis concluded that purchases of the first cryptocurrency in 2020 compared to 2022 are more strategic than speculative. Experts predicted an influx of other institutional investors and further mass adoption. This will happen when the first cryptocurrency confirms its status as an effective tool for hedging macroeconomic risks.
It is worth noting the tendency associated with halvings towards a gradual decrease in selling pressure on the part of miners.
How much do Bitcoin miners influence the market (part 1)
There is also an unpopular opinion regarding the impact of halvings on the price of Bitcoin. According to Coin Metrics co-founder Nick Carter, there are other important growth drivers for the first cryptocurrency.
“I don’t think the halving had any impact on the price of Bitcoin. This is an event that has been known since day zero. I think the catalysts are outside the market or infrastructure-related,” Carter said.
The expert agreed that current growth is more sustainable compared to three years ago.
Bankruptcy
Bankruptcies of trading platforms (exchanges, exchangers) may be the result of hacking or poor management, but they directly affect the value of the currencies they trade.
The South Korean exchange Youbit (NOT to be confused with yobit.net) recently suffered a major hack: 17% of the total assets held by the exchange were stolen. This was not the first time the exchange was attacked. Youbit was renamed Yapizon after the first attack to distance itself from its security failure and not remind users about it.
Due to the huge loss of assets, Youbit cannot guarantee that the stolen funds will return to users' wallets. Because of this, the exchange must declare bankruptcy and follow all bankruptcy procedures to allow current customers to withdraw what was not stolen.
The MicroStrategy Effect and Institutional Interest
In August, analytics software provider MicroStrategy bought 21,454 BTC (~$250 million at the time of the deal), becoming the first public company to invest in Bitcoin. Against the background of the corresponding statement, shares listed on Nasdaq soared by 14.6%.
In September, MicroStrategy CEO Michael Saylor announced the purchase of an additional 16,796 BTC ($175 million at the time of purchase). He estimated the company's total investment in the first cryptocurrency at $425 million, including commissions and expenses.
At the exchange rate as of November 21, the bitcoins acquired by MicroStrategy are valued at $714 million. This means that investments in cryptocurrency over the course of several months increased by 68% - or by $289 million. However, the company is not yet going to record profits - Saylor promised not to sell bitcoins for a century .
These investments caused a significant resonance in the community and beyond - MicroStrategy seemed to add a “plus to the karma” of the first cryptocurrency. An analyst at Quantum Economics called the incident a “MicroStrategy effect,” which marked the beginning of “an institutional scramble for as many bitcoins as possible.
In early October, Twitter creator Jack Dorsey's payments company announced it had purchased $50 million worth of Bitcoin, which amounted to approximately 1% of Square's total assets.
Another resonant manifestation of the “MicroStrategy effect” was the news about the launch of the payment company PayPal the ability to buy and sell Bitcoin. The company said the new feature will encourage global use of cryptocurrencies and prepare the network for central bank digital currencies.
Company CEO Dan Shulman believes that the first cryptocurrency will ultimately be used more for everyday payments rather than as a store of value.
In November, PayPal opened access to Bitcoin and several altcoins to the company's American clients. By the first half of 2022, the functionality will be available to users from other countries.
Representatives of the Pantera Capital fund are convinced that the start of Bitcoin support by the payment company PayPal, in combination with active purchases through the Cash App from Square, has a significant impact on the shortage of the first cryptocurrency and, accordingly, leads to an increase in the price of the asset.
The company estimates that Cash App accounts for 40% of all bitcoins issued. PayPal's recent launch of a service for direct purchase of cryptocurrencies is already having a huge impact on the market, the report says.
According to Pantera Capital calculations, PayPal users buy about 70% of all issued bitcoins. This is evidenced by the growth in volumes on the regulated exchange itBit, which is backed by PayPal partner Paxos.
Researchers claim that PayPal and Cash App clients are already completely withdrawing from circulation all the bitcoins mined daily by miners.
“Where will Cash App customers get their coins? Here we remember the limitations and inflexibility of the proposal. They will buy them at higher prices,” the analysts concluded.
Recently, Coinbase's head of institutional sales, Brett Tejpaul, emphasized the importance of support for the cryptocurrency space from PayPal and other major players.
“For big banks, hedge funds and charities that have remained on the sidelines, the arrival of PayPal is a kind of signal. It provokes a second wave of adoption of digital currencies by institutions,” Tejpaul is confident.
The value of assets stored in the Coinbase custodial service has increased from $6 billion to $20 billion since April of this year. Among the growth factors, Tejpaul noted the takeover of the crypto broker Tagomi, as well as the company’s partnership with JPMorgan and Deloitte.
The demand of large players for Bitcoin and products based on it is also evidenced by the dynamics of the value of crypto assets managed by Grayscale Investments - on November 18, the investment firm reported that the figure exceeded $10 billion for the first time.
After just two days, the value of funds at Grayscale Investments' disposal reached $11.3 billion.
11/20/20 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
Total AUM: $11.3 billion$BTC $BCH $ETH $ETC $ZEN $LTC $XLM $XRP $ZEC pic.twitter.com/UwfKviJNaK
— Grayscale (@Grayscale) November 20, 2020
The company's most popular product remains the GBTC Bitcoin Trust. It accounts for $9.65 billion, which is 85% of total assets.
Since the beginning of the year, the number of bitcoins managed by Grayscale Investments has grown by 79.9%. Data: grayscale.co, bitcointreasuries.org.
According to information on the Bitcoin Treasuries website, the volume of investments by public companies in the first cryptocurrency exceeded $14.15 billion. Grayscale Investments alone holds 2.43% of the total supply of digital gold in its wallets. The aggregate figure for companies on the Bitcoin Treasuries list is 4.01%.
Demand from major players is likely largely due to the fact that in modern conditions Bitcoin is increasingly perceived as a digital store of value. The first cryptocurrency is distinguished not only by its ability to hedge inflation risks, but also by the ability to significantly increase the profitability of a diversified investment portfolio.
Why Bitcoin should be in every investor's portfolio
4% of the total supply of Bitcoin at the disposal of large companies is a fairly high figure. There are only 18.5 million BTC on the market with a total supply of 21 million BTC. If we take into account that several million coins are irretrievably lost, then the actual market supply does not exceed 17 million BTC.
Corporations like MicroStrategy that invest in cryptocurrency tend to be long-term oriented and have no intention of taking profits in the coming months or even years.
Consequently, increasing demand from long-term investors with low time preference may help reduce selling pressure and create a shortage of available Bitcoin supply in the market.
An increase in inflation due to monetary injections by central banks in the medium and long term may also have a positive impact on the prospects of the first cryptocurrency and strengthen its status as a protective asset competing with gold.
Safety
People rely on exchanges to buy and sell their cryptocurrency assets, which requires a certain amount of trust. Just like the old bank robberies of the 1800s, insecure exchanges are juicy targets for hackers looking to make a quick buck.
Any exchange hacks, security failures, or closure of a major exchange can directly affect the value of cryptocurrencies as a whole. All it takes is a simple JavaScript error for millions of coins to be attacked by hackers.
Perhaps the most famous example is the Mount Gox cryptocurrency exchange heist that occurred in 2011, when 850,000 Bitcoins were stolen. At the time, the Mount Gox exchange was the main Bitcoin trading platform, but it was created without any security requirements. The hack caused a mini-crash in the value of BTC at the time, but the cryptocurrency has since recovered.
However, this high-profile exchange hack has caused many trading platforms to take security more seriously, as all it takes is just a minor mistake. Some exchanges even offer generous rewards to hackers who can break into their security systems and report possible loopholes.
Defensive asset test
The inflationary policies of central banks, presented as saving economies from the consequences of the coronavirus pandemic, have led to a widespread decline in confidence in fiat currencies.
COVID-19, the Fed's printing press and uncertainty: why it's time to pay attention to Bitcoin
In 2022, investors rushed to buy gold, traditionally perceived as a “safe haven” during periods of macroeconomic uncertainty. The demand for an even more scarce asset, Bitcoin, has also increased significantly.
As a result, the correlation of the first cryptocurrency with gold has increased, reviving discussions around the hypothesis of a defensive asset.
The 90-day correlation of Bitcoin with gold is much higher than with the “barometer of the American economy” - the S&P 500 index (0.54 versus 0.3). Data: BlockchainCenter.
The closeness of the statistical relationship with the stock market gradually declined after a surge in the indicator’s growth against the backdrop of the March global panic.
Bitcoin's 90-day correlation to the S&P 500. Data: BlockchainCenter.
The well-known author of the bestseller “Rich Dad Poor Dad” Robert Kiyosaki predicted a fall in the price of Bitcoin following gold and silver amid positive news about vaccines against COVID-19. However, in reality everything turned out differently - from November 6 to November 17, the first cryptocurrency rose in price by 13.4%, the most popular precious metal fell in price by 3.6%.
“There is an increase in demand for Bitcoin from those investors who previously hedged the risks of inflation and a weakening dollar through the purchase of precious metals,” analysts at Deutsche Bank suggested.
Representatives of Citibank have no doubt that investors increasingly prefer Bitcoin to gold. In their opinion, the price of the first cryptocurrency by the end of 2022 can reach $318,315 thanks to securing the status of digital gold in the 21st century.
Citibank Managing Director Tom Fitzpatrick noted that the COVID-19 pandemic and associated government monetary and fiscal measures are creating a market environment similar to that of the gold market in the 1970s. Authorities in developed countries have given a clear signal that they will not shy away from unprecedented money printing until GDP and employment recover.
Michael Sonnenschein from Grayscale Investments is confident that the growth in the number of Bitcoin investors indicates the viability of the first cryptocurrency as an asset class.
“I think what they [investors] understand by buying and including Bitcoin in a portfolio is that it is a store of value, a hedge against inflation, digital gold and a new form of money that is much better suited to today's digital world than historical stores of value such as gold “- emphasized the managing director of Grayscale Investments.
Analysts at JPMorgan financial holding company found that Grayscale Investments' Bitcoin trust is outperforming gold-based exchange-traded funds (ETFs) in terms of inflows. The main reason is the growing demand from institutional players.
“We previously noted Bitcoin’s significant potential for long-term growth if it competes more intensely with gold as an “alternative” currency,” the experts emphasized.
Former colleague of George Soros in the Quantum fund, billionaire Stanley Druckenmiller, invested part of the capital under his management in the first cryptocurrency. He admitted that Bitcoin may be a better store of value than gold.
“I own many times more gold than Bitcoin. But frankly, if betting on gold works, then betting on Bitcoin will probably work better. The latter’s market is smaller, not as liquid and has a higher beta,” the billionaire said.
Druckenmiller predicted a fall in the US dollar over a three- to four-year horizon and an increase in the attractiveness of digital gold as a “capital preservation tool.”
Legendary trader Paul Tudor Jones told his clients that he views Bitcoin futures trading as a hedge against the current policies of central banks that are printing money to combat the coronavirus pandemic.
“To maximize profits, you need to own the fastest horse. If you want to hear my forecast, I would bet on Bitcoin,” Jones emphasized.
Bitcoin, in his opinion, is a store of value. The asset, the billionaire claims, has passed the strength test according to four criteria: purchasing power, liquidity, portability and reliability.
Jones, who has up to 2% of his assets invested in digital gold, sees significant growth potential in the first cryptocurrency.
“Bitcoin has a huge number of really smart and sophisticated people who believe in it. “It’s like investing with Steve Jobs and Apple or investing early in Google,” said the head of Tudor Investment.
Mexican billionaire Ricardo Salinas Pliego, who invested 10% of his funds in Bitcoin, is confident that the first cryptocurrency “protects the citizen from expropriation [of assets] by the state.”
Earlier, the founder of Grupo Salinas published a video showing garbage bags with Venezuelan bolivars.
Para iniciar con el #Bitcoin, les comparto un video tomado en un país latino donde los bancos tiran el dinero a la basura (el papel moneda no vale nada) es por eso que siempre es bueno diversificar nuestro portafolio de inversiones
