Bitcoin and Cryptocurrency’s 2020 Turnaround

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Bitcoin and Cryptocurrency’s 2020 Turnaround

The prospects for Bitcoin (BTCUSD) and, by extension, cryptocurrency markets did not appear promising at the start of 2020. Both were shakily striving to recover after a protracted market decline and an increase in cyber crime. Market liquidity remained poor, and institutional investors continued to avoid cryptocurrencies.

Then came the epidemic. Multiple rounds of unregulated central bank stimulus spending jolted Bitcoin out of its price slumber and enhanced its economic appeal as a store of wealth. Its value surpassed the $20,000 mark established almost three years ago amid a thriving economy in early December, and it has increased by more than 200% since the beginning of this year.

Meanwhile, cryptocurrency markets have risen to $760 billion, just shy of its $800 billion estimations in 2017, and have risen dramatically from their $185 billion market worth at the start of this year.

Key Takeaways

  • Bitcoin and cryptocurrency values climbed to new highs in 2020, as investors flocked to new asset classes due to concerns about macroeconomic instability.
  • Bitcoin benefited greatly from institutional investors and banks announcing interests in the cryptocurrency and its trading environment.
  • However, the crypto economy is still beset by a number of issues, including frauds and a lack of liquidity.

What Caused the Increase in Bitcoin Price?

Several events conspired to create the ideal storm for Bitcoin and cryptocurrency markets to grow in the second half of this year.

One of them was (and still is) central bank policy during the pandemic shutdown. Analysts cite macroeconomic uncertainty caused by unrestrained stimulus during the economic shutdown, as well as low interest rates, as important factors for investors to invest in Bitcoin. The scarcity of cryptocurrencies contrasts with the rush of expenditure by central banks throughout the globe. This monetary policy strategy has the potential to devalue fiat currencies and cause excessive inflation.

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In a low-interest-rate environment defined by concern of macroeconomic volatility, institutional investors chose a risk-on strategy. In their pursuit for investable assets, investors re-evaluated Bitcoin and strengthened its trading infrastructure.

Unlike Bitcoin’s price increase in 2017, when the chorus was primarily negative, the accompaniment this time has been positive. As a result, several institutional investors are already betting on Bitcoin. They were far from alone. Publicly traded corporations such as Square, Inc. (SQ) and MicroStrategy Incorporated (MSTR) have also invested in Bitcoin, with the latter incorporating it into their treasury management approach.

This year also marked a watershed moment in Bitcoin’s fledgling existence. Another Bitcoin halving reduced the pace of production, limiting the cryptocurrency’s total supply on the market. In most cases, the event is accompanied by a price increase. But it is a sign of this weird year that the event, which was expected to see record inflows, hardly caused a ripple in crypto markets. Nonetheless, the decrease in supply contributed to create the conditions for Bitcoin’s subsequent price surge.

Will This Time Be Different?

Things have changed since 2017, yet they have also remained the same. Bitcoin’s price remains irrationally volatile. Within the last week, the cryptocurrency has gained almost $100 billion to its total market worth while breaking beyond $29,000.

This unpredictability provides ideal ground for crooks and con artists. By October, hackers and fraudsters had stolen $1.8 billion from bitcoin exchanges and ecosystems. The Securities and Exchange Commission (SEC) has also filed a lawsuit against Ripple’s XRP (XRPUSD), the third largest cryptocurrency by market capitalization.

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A liquidity problem persists, but at a lesser extent now that bigger exchanges are used. The price difference between crypto exchanges persists. Even if they have overcome their reservations about Bitcoin and cryptocurrencies, institutional investors are still hesitant to commit entirely. The Grayscale Bitcoin Investment Trust (GBTC) has seen record inflows. The trust provides investors with indirect exposure to Bitcoin, sparing them the trouble and expense of holding Bitcoin. As a result, they become crypto tourists, able to ride a rising trade and escape when the price drops.

After many failed efforts at launching a Bitcoin exchange-traded fund (ETF), San Francisco-based Bitwise Asset Management decided to create a crypto index fund this year. While the emergence of such investment vehicles allows institutional investors to benefit from Bitcoin and crypto, the seasonality of such investments assures that crypto’s liquidity issue will endure.

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