Bitcoin had quite the year in 2020. It rallied astonishingly, reaching nearly $37,000 at its peak, though it has now stabilized at around $32,000. Interestingly, the rally was rather quiet, with few taking note of the jump of a full one thousand percent from March lows. [1] How can we explain this astronomical rise?

With most retail stock, the impulse is to look at the product or its market. However, with cryptocurrencies, the story is a lot closer to the likes of bonds and gold as a store of value (i.e. an asset which retains its value and does not depreciate). Bitcoin, technologically, is very static. Not much about the currency as a ‘product’ or entity itself can be said to prompt increased or renewed interest in it. So, on the one hand, the technology that sustains Bitcoin cannot explain the sudden rise in its value. Bitcoin as a currency, on the other hand, can. 

The cryptocurrency has gone through a series of what we might call ‘social updates’ that have brought it out of finance’s margins and shown it to be a valid monetary asset. First is Bitcoin’s exploding network externality–those increasing scores of individuals which give Bitcoin its utility, the ‘peers’ of a peer-to-peer currency network. As with all currencies, high liquidity is absolutely necessary and requires mass usage. Crypto currencies are collectively edging closer to meeting this requirement, with an estimated 100 million individuals now using them.

The second social update goes a bit deeper. While it makes perfect sense that currencies become more useful (and thus valuable) the more people use them, it is much more difficult to explain why individuals opt in to a currency that is not tied to any region, state or market. No one was born into a society where Bitcoin was the primary means of exchange; none yet exists. 

So, why are people buying into Bitcoin? For one, the cryptocurrency shows signs of stabilizing in contrast to the signs of instability currencies and global markets are currently showing. Bill Miller, former CEO of Legg Mason, correlated the two when explaining why Bitcoin is “gaining acceptance every day.” [2] That acceptance is exacerbated by the fact that the federal reserve is printing money at an unprecedented rate, spurring destabilizing inflation fears. Here, Bitcoin’s limited amount of coins–which counterpoise traditional fiat currencies’ ability to simply ‘print more money’– works heavily in its favor.  

Miller is not alone in considering Bitcoin a strong contender among others for a store of value. The currency is now being eyed as a “gold-like asset alternative,” and has been acknowledged as such by the CEOs of BlackRock, JPMorgan and other prominent financial institutions. [3] Institutional investors, with less erratic and reactive behaviors than individual investors, are moving onto the scene. They add stability, credibility and consistency to the playing field, in other words authenticating the exchange of Bitcoin on a grand scale. Furthermore, at least in the United States, regulatory agencies like the Office of the Comptroller of the Currency (OCC) are actively supporting regulated exchanges of crypto assets and are continuing to enhance the regulations surrounding investment in cryptocurrencies. [4]

If infrastructure was the greatest hurdle to clear in the hopes of making Bitcoin a stable, valid monetary asset, then it appears the currency’s backers are at least one foot over. There is an irony in this, one which presses against the decentralized vision of the currency’s shadowy creator, Satoshi Nakamato (so-called). That is, Bitcoin, a decentralized currency, is now finding its bearings on the backs of established financial actors, central institutions and regulatory agencies. 

Lastly, as to the notion of whether the spike is merely activity within a bubble:

“The first time, your interest may be piqued, but you are wary of buying into something that looks like a bubble. The second time, you realize that what you mistook for a bubble was in fact a cyclical process in a longer-term trend.” [5]

Sources:

[1] – Carter, Nic, “What Explains Bitcoin’s Resurgence?,” Intelligencer, 17 Jan. 2021, https://nymag.com/intelligencer/2021/01/why-is-bitcoin-making-new-all-time-highs.html, accessed 21 Jan. 2021.

[2] – Ibid.

[3] – Ibid.

[4] – Ibid.

[5] – Ibid.