Unlike in 2017, the current Bitcoin bull run looks sustainable
Bitcoin has skyrocketed to $19,000 a coin after it dropped to $3,122 in late 2018. The cryptocurrency is now almost back to its all-time high value of $19,783 reached in December 2017. In the last two months alone, the cryptocurrency has added almost $10,000 in growth. Most market participants believe Bitcoin’s current bull run is sustainable. JP Morgan predicts its price can achieve $140,000+. Here’s why:
Quantitative Easing or QE is a monetary policy whereby a central bank buys government bonds or other financial assets by printing money in order to inject liquidity into the economy. This is typically done during times of crises as governments try to stimulate economic activity. In response to the massive economic contraction stemming from Covid-19, many central banks around the world, including those of the US, Europe and Japan, have engaged into unprecedented levels of quantitative easing. And, as governments print trillions of dollars, the value of fiat currencies (national currencies) depreciates. This is meachanically driving the value of safe havens (such as Bitcoin) higher.
The stock market has also been a beneficiary of QE. Given the disconnect between the real economy and stock prices, many market participants think the stock market is in bubble territory that could burst as soon as quantitative easing policies subside. In this case, we see Bitcoin as an attractive alternative investment vehicle for those who are cautious about an unsustainable stock market. As a reminder, Bitcoin flourishes at times of crises — the cryptocurrency was launched in January 2009 on the back of the Global Financial Crisis.
This is the main development that could support further growth of Bitcoin in the coming years. The major difference between 2017 (which was followed by a massive drop in Bitcoin price) and today is that we see institutional investors jumping on the Bitcoin band wagon. As an example, PayPal has decided to incorporate cryptocurrencies into their services: Users on its platform will be able to purchase bitcoin as well as other cryptocurrencies such as Ethereum, Bitcoin Cash and Litecoin.
Payment company Square has also made a move towards cryptocurrencies. The company acquired 4,709 Bitcoins worth approximately $50 million. This represents 1% of the company’s total assets. Square stated in a release that it “believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose.”
Even JP Morgan has changed its stance on this emerging technology: the CEO of the bank called Bitcoin a fraud in 2017 and but said recently that ‘very smart people are investing in Bitcoin these days.’
All these examples are, in our view, further recognition of the legacy of digital currencies.
Bitcoin was designed to share many of gold’s unique properties: Both are positioned as safe havens. Both can be mined. And both cannot be counterfeited. Having said this, Bitcoin stands out versus gold given it is a more useful and viable medium of exchange. In fact, cryptocurrencies are increasingly used to exchange goods and services, which is not the case of gold. We understand why more and more institutional investors are looking at it as an alternative to gold. JP Morgan believes that the market cap of Bitcoin needs to rise by 8 times from its current value to match the total private sector investment in gold via ETFs or bars which stands at $2.6 trillion. If this is achieved, Bitcoin price would be at $140,000+.
Just like Square is only investing 1% of its assets in Bitcoin and given their speculative nature, we are of the view that no one should be investing more than 5% of their net worth in Bitcoin or cryptocurrencies in general.
All cryptocurrencies are facing scalability challenges. In fact, the blockchain technology which is at the heart of all cryptocurrencies is hardly scalable and is not energy efficient. If blockchain technology doesn’t solve this issue, we struggle to see cryptocurrencies becoming sustainable means of payment.
Price of cryptocurrencies is irrelevant: One can make a Bitcoin payment at a Bitcoin price of $1 million, $10,000, or $0.01 a coin. Bitcoin doesn’t have an intrinsic value — its price is a pure function of supply and demand.