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Bitcoin Is Going to Crash. The Big Question Is When
Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The reasons for its appreciation vary, but Bitcoin has grown from what was once considered a scam by many into something that has matured into a viable investment made by famous billionaire investors, large institutions, and retail investors alike.
Why are these investors so bullish on Bitcoin even after it has surpassed all-time highs? Since the gold standard was removed in by Richard Nixon the amount of circulating dollars has steadily increased. While there are certainly people suffering from a lack of jobs and businesses shutting down, the increase in money supply has significant long-term implications for the purchasing power of the dollar.
The stimulus spending has led many to fear far greater inflation rates, and rightfully so. To hedge against this inflation investors have sought assets that either maintain value or appreciate in value. Over the course of , this search for a store-of-value asset to hedge against inflation has brought them to Bitcoin. There are many assets that are considered a store-of-value.
Perhaps the most common assets that come to mind are precious metals like gold or other things that have a limited supply. With gold, we know that it is a scarce resource, but we cannot verify with complete certainty how much exists. And, while it may seem far fetched, gold exists outside of earth and may one day be obtainable via asteroid mining as technology advances.
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This is where Bitcoin differentiates itself. We can verify with certainty how many exist now and how many will exist in the future. This makes Bitcoin the only asset on the planet that we can prove has a finite and fixed supply. And I think a lot of them are actually thinking about the juxtaposition between digital currencies, like Bitcoin, which have verifiable scarcity and thinking about that in the context of Fiat currencies, like the US dollar which seemingly are being printed unlimitedly.
With further money printing on the horizon from stimulus packages, as well as talks of student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store-of-value assets more compelling. To further understand why Bitcoin has a verifiable finite limit to its quantity it is important to understand the mechanism built into its code known as the Halving. Every , blocks that are mined , or about every four years, the reward given to miners for processing Bitcoin transactions is reduced in half.
In other words, built into Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation.
The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are Why is this important? As discussed before, the rising inflation and growing quantity of the US dollar lower its value over time. With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its rate of inflation relatively consistent. With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year.
Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.
Each halving Bitcoin has experienced a massive bull market that has absolutely crushed its previous all-time high. The second Bitcoin halving occurred in July of Should Bitcoin continue on this trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future. Some investment firms have made Bitcoin price predictions based on these fundamental analysis and scarcity models. As discussed, the narrative of Bitcoin as a store of value has increased substantially in , but not just with retail investors.
A number of institutions, both public and private, have been accumulating Bitcoin instead of holding cash in their treasuries. Investments of this magnitude suggest strong confidence among these institutional investors that the asset will be a good hedge against inflation as well as provide solid price appreciation over time.
Why Does the Price of Bitcoin Keep Going Up?
Aside from companies flat out buying Bitcoin, many companies are now beginning to provide services for them. Fidelity Digital Assets, which launched back in October , has provided custodial services for cryptocurrencies for some time, but they are now allowing clients to pledge bitcoin as collateral in a transaction. One reason for the massive price rise is that there has been a big influx of investors from large-scale institutions such as pension schemes, university endowment funds and investment trusts.
This time, big names such as billionaire investor Paul Tudor Jones and insurance giant MassMutual have invested heavily, while even former naysayers like JP Morgan now say that bitcoin could have a bright future. This all helps to increase trust in the cryptocurrency and indicates that it is becoming more mainstream. Bitcoin has also been backed by a few large consumer-facing payment names.
PayPal now allows customers to buy, hold and sell bitcoin directly from their PayPal accounts. Rival digital payment firm Square reported in November that more of its Cash App users are buying the digital currency, and buying more on average than before.
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In October it announced a handful of bitcoin-related credit and debit cards with leading crypto exchange Coinbase. With more and more ways of using bitcoin, it should mean that more people will want to hold it.
Institutional Investors See Bitcoin as an Inflation Hedge
Bitcoin has also become much more mature since the days when it was used mainly as a method to purchase drugs on the dark web on Silk Road. Bitcoin digital wallets, keys and exchanges are easier to access and there is a lot more reliable information out there than before. The introduction of financial products such as bitcoin futures and options, as well as blockchain-related funds , has allowed investors who might otherwise have been fearful of volatility to get involved.
Nobel laureate Robert Shiller has suggested that the bubble could have been linked to the fact that there were no bitcoin futures at the time. Besides all this mainstream enthusiasm, the carnage brought by COVID has led to huge stimulus packages from governments around the globe and many central banks printing more money. In the face of this threat, investments like bitcoin are being consider a store of value. The maximum number of bitcoin that will ever exist is set at 21 million unless the protocol changes , and there are already about The supply of new coins is also slowing down because the reward that bitcoin miners receive for verifying transactions on the blockchain halves roughly every four years — it fell from BTC This scarcity is comparable to that of precious metals.
Even central banks are embracing cryptocurrencies. Russia, China, Canada, the EU and many others are either already working on central bank digital currencies CBDCs for their countries or publishing white papers detailing their intentions to do so.