Bitcoin’s meteoric rise in value has left many investors wondering what is driving the surge in the cryptocurrency’s price. There are several factors contributing to the increase in Bitcoin’s value, including previous resistance, inflation and the rush towards safe-haven assets, growing adoption as a means of payment, institutional investment, halving and the stock-to-flow model, and the rising cost of production. Understanding these factors is crucial to understanding why Bitcoin’s price is rising and how it may perform in the future.
Bitcoin has experienced volatile peaks and troughs, with its last peak near $14,000 in June of 2019. At that point, Bitcoin experienced hard resistance and failed to push through this stage. Bitcoin retested this resistance point in October only to fall back down. However, on November 4th, Bitcoin pushed straight through $14,000 and continued higher. This is significant because Bitcoin’s next resistance point is its previous all-time high of $20,000. With Bitcoin no longer having a theoretical resistance point until its previous all-time high, many investors have become bullish that the cryptocurrency will be able to retest that price point or even push past it.
Inflation and the Rush Toward Safe-Haven Assets
Another reason for Bitcoin’s rise is the growing inflation of the U.S. dollar. Recent stimulus spending is poised to greatly increase the level of inflation and decrease the dollar’s purchasing power. To hedge against this rising inflation, many have retreated from the dollar and have taken shelter in assets that historically have held value or have even appreciated in value. These ‘safe-haven’ assets include things like precious metals, stocks in sectors that are generally less volatile, and more recently, Bitcoin.
Adoption as a Means of Payment
Another reason for Bitcoin’s price appreciation is its growing adoption as a payment method. Recently, PayPal announced that it would soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as a form of payment. PayPal has nearly 350 million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also owns the widely popular payment app, Venmo. Venmo has more than 40 million active accounts, making the accessibility to Bitcoin and other cryptocurrencies even more significant.
In the current societal and economic climate, there is a growing incentive to hold less cash and be hedged against intense market swings. Publicly traded companies have been converting cash in their treasuries over to Bitcoin as a more sound store-of-value. Most notably, MicroStrategy converted $425 million worth of cash in its treasury to Bitcoin, and Square made a $50 million purchase. Since then, a number of companies have followed suit. The confidence that these companies and their investors have in Bitcoin has given increased merit to the concept of Bitcoin as a store-of-value and safe-haven asset.
Halving and the Stock-To-Flow Model
Perhaps the most important reasons for the rise in Bitcoin’s price are two attributes that are inherent in its design. The first is that there is only 21 million Bitcoin that will ever exist, and this number will always stay static. The second is a process coded into Bitcoin called the halving. Essentially, Bitcoin has its own built-in escrow mechanism where Bitcoin is released and given to miners as a reward for processing transactions. This reward is cut in half every four years. By doing so, Bitcoin’s rate of inflation is reduced by half each halving, and its stock-to-flow ratio is doubled each halving. This process continues every four years until all Bitcoin in this escrow mechanism is released and in circulation. From that point on, Bitcoin in circulation will be capped at 21 million. As of the time of writing, there are
the reasons behind the recent rise in Bitcoin’s price are varied and complex, but they all point to a growing interest and adoption of the cryptocurrency as a valuable asset. Factors such as the lack of resistance, inflation and the rush towards safe-haven assets, adoption as a means of payment, institutional investment, the halving and the stock-to-flow model, and the rising cost of production all contribute to the increasing value of Bitcoin. It remains to be seen whether Bitcoin will continue to rise or experience another significant drop, but for now, it seems that the cryptocurrency is here to stay as a major player in the world of finance and investment.
Based on my understanding, retail and small investors have suffered significant losses in the stock market in recent times. As a result, they have lost confidence in the stock market and are hesitant to further increase their losses. They are now exploring opportunities in cryptocurrency to avoid losses and increase their accumulated capital. Despite Bitcoin being at half the price from its highest level, it has been maintaining its position for some time and moving slowly, which may be why investors are turning to it.
It is suggested that the decline of the stock market in the past, and the losses incurred by the common man, have turned investors towards cryptocurrency. This may be the reason for the sudden 30% surge in Bitcoin’s value over the last few days. It remains to be seen how long this rapid rise will last and if it will go back to its previous high of $20,000 or even fall back to $14,000. At present, it is uncertain which direction Bitcoin will take.
Please note that investing in the share market or cryptocurrency is subject to market risks. The prices of stocks and cryptocurrencies can fluctuate rapidly and may be affected by various factors beyond our control. Therefore, it is important to conduct your own research, seek professional advice, and invest only what you can afford to lose. This article is for informational purposes only and does not constitute investment advice. The authors, publishers, and distributors of this article do not guarantee the accuracy, completeness, or reliability of the information provided, and shall not be liable for any loss or damage arising from reliance on this article.