Bitcoin: what has caused the cryptocurrency’s latest revival?

Bitcoin, a major player in the world of digital currency, has achieved a fresh milestone in value following a period of over two years since its last high. Yesterday, the virtual asset surpassed the previous peak it made in November 2021 when it came close to hitting $69,000, though it dipped back down to around $64,000 shortly afterwards.

The current value of Bitcoin has jumped up to approximately $1.3 trillion, which makes up a significant portion of the overall $2.6 trillion cryptocurrency market. What has sparked this recent resurgence? Let's explore the elements that have contributed to it.

In 2008, a person with a pseudonym name "Satoshi Nakamoto" wrote a white paper introducing a novel idea, which was the creation of a digital currency. This currency would enable individuals to make online payments without involving any third-party organizations or financial institutions. The name of this digital currency is Bitcoin.

The issue of someone creating a copy or a fake version of a digital token, also known as the "double spend" problem, cannot be stopped by a third-party regulating the system as it would contradict the core principles of bitcoin. Instead, this problem is resolved by documenting the transactions on a publicly available ledger known as a blockchain.

All of this is ensured with cryptography, which shields transactions with a type of coding known as public-private key encryption. This allows for transactions to be carried out sans the presence of a financial establishment in between.

Bitcoin "miners" are responsible for adding transactions to the blockchain. They do so by solving a complex cryptographic puzzle utilizing specialized hardware, and then packing the transactions into blocks that are linked together in a chain. As a reward for their efforts, these miners receive newly generated bitcoins.

Why Is Bitcoin In Such High Demand?

Bitcoin is cool because it doesn't need banks or other powerful people to do transactions. You can move money around without them watching and making money off of you. A dude named Tim Swanson said it's like digital money that can't be censored.

Bitcoin has also profited from a period of low interest rates, a trend that has persisted ever since the financial crisis of 2008. This has caused some investors to choose riskier assets, including cryptocurrencies, in search of higher financial returns. Moreover, it is known as a safeguard against inflation, in much the same way as gold, because central banks cannot decrease its value by printing more of it. This is because bitcoin is programmed to have a limited number of units in circulation – precisely 21 million.

Carol Alexander from the University of Sussex business school is of the view that it is a misconception to consider bitcoin as a reliable store of value like gold to shield against market fluctuations and price escalation.

According to her, bitcoin has been compared to gold for its perceived lack of connection to the stock market, but its volatility as an asset makes this comparison inaccurate.

Additionally, the cryptocurrency's achievements at different junctures throughout its brief lifespan has enticed individuals lured by the buzz surrounding its occasionally impressive profits. Notably, its value surged by 70% during May of 2017.

What Caused The Price Increase?

One of the primary reasons for the surge in bitcoin's value in 2021 is the green light given by the US financial regulatory agency to exchange-traded funds [ETFs] in January. ETFs are a collection of investments that can be purchased and sold on an exchange market, just like stocks, and they mirror the current price of bitcoin.

Jeff Billingham, the Director of Strategic Initiatives at Chainalysis research firm, believes that the recent ETF announcement is evidence of the cryptocurrency market's "institutional maturity". He explains that in previous cryptocurrency bull runs, the infrastructure and trust in the market were not as developed as they are now.

The cryptocurrency market's reliability remains uncertain as evidenced by the downfall of FTX, a significant crypto exchange, in November 2022. This led to the trial and conviction of their CEO and founder, Sam Bankman-Fried. Additionally, Changpeng Zhao, a prominent figure in the market, and founder of Binance, the biggest cryptocurrency exchange globally, is facing a jail sentence after admitting guilt to money-laundering crimes at a federal level in the United States.

Gary Gensler, the leader of the SEC, continues to doubt the market even though he reluctantly gave the green light for bitcoin exchange-traded funds (ETFs). He felt compelled to do so after a legal decision was made.

According to an announcement regarding the approval of ETFs, Bitcoin mostly serves as a speculative and unstable investment with potential links to unlawful activities such as ransomware, laundering money, avoiding sanctions, and funding terrorism.

According to James Knightley, who holds the position of being the chief global economist at ING, high inflation numbers noticed in the United States in recent weeks have spurred on individuals who purchase bitcoin, viewing it as a safety procedure in response to an increase in prices. Furthermore, an overall surge in tech shares has directed financiers to consider more dangerous investments, including bitcoin.

The willingness to take risks has increased significantly in the past few weeks, as the booming technology sector is making people afraid of missing out on market opportunities. Consequently, many are speculating that bitcoin is being carried away by this trend.

"Can The Recent Increase Last?"

According to Neil Wilson, who serves as the chief analyst at brokerage company Finalto, the momentum witnessed in the market will eventually come down. Wilson believes that when prices skyrocket at an alarming rate, known as "parabolic" market moves, they can never be maintained in the long term.

The writer predicts that the progress will eventually slow down, but that doesn't signify that it won't increase any further. Instead, there will probably be a period of consolidation or correction for some time. The reason behind this could be that investors may start taking their profits and there would be a decrease in the number of new buyers in the stock market as well. These are the conventional factors that contribute to these fluctuations.

Another event to look forward to is the upcoming "halving" phenomenon. This event occurs when the amount of bitcoin distributed through mining is cut in half, causing an increase in prices as the limited supply results in a higher demand. This has been a pattern observed in the past, leading to an upward trajectory in the value of bitcoin.

According to John Reed Stark, who used to be a high-ranking SEC employee and now teaches at Duke University's school of law, the "greater fool" concept will apply. This means that someone will always be willing to purchase an overpriced item, but eventually, there won't be anyone left, and the asset's value will plummet. As a result, people can profit off of inflated assets until the bubble bursts and the value drops significantly.

Can Bitcoin Price Be Impacted By Regulatory Crackdown?

Authorities are implementing stricter control measures for digital currencies in the United Kingdom and European Union. The UK Treasury is suggesting that stablecoins, a particular type of cryptocurrency with its value tied to another asset, such as a commodity or currency, be placed under current regulation. Similarly, the EU has introduced the Markets in Crypto-Assets regulation (MiCa), which necessitates that crypto organizations register with a member state regulator.

A stablecoin is a form of digital currency that aims to maintain a consistent value, typically pegged to a traditional currency like the US dollar. The methods used to achieve this goal can differ depending on the stablecoin. For instance, some of the biggest offerings like tether and USD Coin function more like financial establishments. They stockpile significant reserves in assets that can be sold quickly for cash or other investments to keep the price steady.

There are some stablecoins called "algorithmic stablecoins" that also aim to maintain a stable value but without having any reserves to back them up. However, these stablecoins have received negative feedback as they can potentially function like Ponzi schemes, relying on a steady stream of money coming in to prevent a sudden crash.

Stablecoins play a crucial role in the world of cryptocurrency. They offer a secure alternative for investors to safeguard their funds without having to go through the inconvenience of completely withdrawing them. Moreover, they enable assets to be categorized in regular money, instead of other highly unpredictable tokens.

The approval of the US ETF is a recent regulatory action that has contributed to the increase of bitcoin's price.

Harry Eddis, who is in charge of the fintech department worldwide at the law company Linklaters situated in London, suggests that regulations need to be enforced more strictly for crypto assets such as ETFs. This could result in more people feeling confident when investing in cryptocurrencies, who may otherwise be hesitant due to trust issues. In addition, it could attract more investors into the market, leading to a potential increase in bitcoin's value if they choose to invest in that particular digital currency.