In an environment of low interest rates and political instability, institutional investors turned their attention to bitcoin. This will support the cryptocurrency rate in 2021, although there are many risk factors for it.
In the past 2020, we saw a new surge of interest in bitcoin and cryptocurrencies in general. The number of active bitcoin addresses for the first time since 2017 exceeded the million mark, and the bitcoin rate grew rapidly while the world around was plunged into chaos. Let's try to figure out what are the reasons for this growth, what is the reason for the sharp drop after the January holidays and what to expect next.
Pandemic, inflation, dollar
From March to the end of November 2020, the dollar money supply (M1) grew from $ 4 trillion to over $ 6.5 trillion. The main reason was the economic stimulus programs adopted in the United States to combat the pandemic. Moreover, Congress continues to negotiate another stimulus bill worth about $ 1 trillion.
The situation in the eurozone is no better: the introduction of Basel-3 standards, which strengthen the capital requirements of banks and introduce new regulatory requirements for liquidity, an increase in the money supply, zero or negative rates on deposits and government bonds - all this reduces the investment attractiveness of old instruments and creates preconditions for searching alternatives.
Why Bitcoin
Bitcoin has been an investment vehicle for 11 years and is gradually developing. If earlier it could only be stored and transferred in the hope of an increase in value, now there are new opportunities for making money in the cryptocurrency market. And the initial properties of bitcoin, such as the absence of a centralized issue and technologically determined emission volumes, protect the investor from turning on the printing press mode.
The slogan with which bitcoin began in 2009 - "Let's return control over money to the people" - remains relevant, as restrictions become more and more, and there are less and less real mechanisms for protecting investors.
Market institutionalization
Another special feature of 2020 is that it changed the perception of cryptocurrencies not only among the general market, but also among institutional investors. A number of funds have begun to actively acquire cryptocurrencies. Recent investors include Square (SQ), MicroStrategy (MSTR), insurance giant MassMutual and many more. In total, they acquired about a million bitcoins, most of which were collected in 2020. The largest holder of the cryptocurrency is now the investment company Grayscale Investments and its fund - Bitcoin Trust Grayscale. As of January 11, 2021, the company managed $ 24.5 billion. An investment of this size implies confidence of institutional investors in the instrument.
Bitcoin's market capitalization has added over $ 300 billion during 2020, and the number of addresses with more than 0.01 BTC increased by more than 700,000, according to a report by CoinMetrics. According to the same report, price increases amid rising active addresses indicate organic rather than the speculative nature of the development of the network.
Simplified access
The high interest in buying bitcoin led to the simplification of the procedure for acquiring an asset. For example, PayPal has opened access to cryptocurrencies to more than 360 million active users.
Fidelity Digital Assets, founded back in October 2018, allows customers to pledge bitcoin as collateral for a transaction. The Chicago Board Options Exchange (CBOE) and a group of leading exchanges in Chicago and New York (CME Group) plan to launch new cryptocurrency products for institutional investors in 2021. Many neobanks and exchange services already allow you to purchase Bitcoin using Apple Pay, and the number of banks, brokers, currency dealers willing to work with cryptocurrency is growing rapidly.
Beyond Bitcoin
In addition to the growth in the rate of bitcoin itself, new ways to earn money appear on the cryptocurrency market. In 2020, one of the main market trends was DeFi protocols - various financial services (credit, investment, exchange) based on the blockchain. DeFi is virtually the only way to generate recurring fixed income in cryptocurrencies. The annual percentage rate of return (APY) in the top 5 DeFi protocols ranges from 15% to 166% per annum - results that cannot be imagined in today's traditional markets.
DeFi now houses over $ 20 billion in cryptocurrencies and the number of protocols is growing almost daily. The emergence of new instruments on the cryptocurrency market and the expansion of their functionality allow the market to grow and acquire more and more active participants.
Risks
In early January, the bitcoin price fell by 28%, but by 17:00 on January 13, the BTC rate resumed its growth and fluctuated around the $ 35,000 mark.
As always, after sharp drops in the rate, many again began to talk about the death of bitcoin, although most experts believe that this is only a correction after a rapid growth. In addition, the aggravation of the political situation in the United States affected the traditional markets as well, and in January we saw a drop in the S&P 500, Dow and NASDAQ indices. Therefore, it makes no sense to consider this drop in detail, but it is better to look at the factors that can negatively affect the price of bitcoin in the near future.
Low turnover
At the moment, it is not clear how many bitcoins out of the total supply of almost 19 million coins are actually circulating on the market. Most likely, the number of traded assets is much lower than the total issue. In this regard, two factors are noted that can significantly drop the price of bitcoin:
- Entering the market of currently inactive wallets;
- Sharp sale and profit taking by institutional investors.
Now both scenarios are rather unlikely, but it is not clear how the market will react to the next fall in the bitcoin rate.
Tighter regulation
Recently, more and more global regulators have come up with projects to create CBDCs - digital currencies of central banks. Such an initiative could seriously harm the entire cryptocurrency market. And that's why:
- Firstly, these instruments have nothing to do with cryptocurrency in the traditional sense, because CBCD is the only issuer.
- Secondly, in order to promote government tokens, regulators may complicate access to the already existing cryptocurrency market, which will scare off some of the players.
- Third, such initiatives could lead to new prosecutions, similar to the story with the Ripple payment system in late 2020.
What to expect in 2021
The growth of the bitcoin rate in the past six months and the emergence of more and more tools for making money in the DeFi sector make it possible to optimistically assess the future of the market. Of course, the risks are still high and in 2021 we will have a lot of news about rate jumps. and possibly tighter regulation. However, with a sensible investment strategy and a careful approach to what is happening on the market, Bitcoin should become a good tool for long-term investment.
In addition, in 2021, I expect significant growth in altcoins, primarily Ethereum. The ether rate has already passed the $ 1000 mark, and the technological development of Ethereum and the growing interest in DeFi protocols should ensure the further growth of the second world cryptocurrency.