Bitcoin is currently enjoying a bull run not seen since the boom times of 2017. While back then, speculation and general FOMO (Fear Of Missing Out) fueled its meteoric rise to near $20,000, today, there seems to be a different catalyst. Recently, large institutional investors and more widespread adoption are sending Bitcoin prices closer to those 2017 highs.
The timeline
The 2017 highs didn’t last long, and 2018 was a terrible year for the most popular cryptocurrency. From its All-Time High to December of 2018, it lost over 80% of its value. 2019 saw a recovery, but the price continued to be extremely volatile. The past three months, however, have seen Bitcoin’s price rise without significant corrections. In fact, since late July 2020, Bitcoin’s price has increased by over 50%. Is this more speculative buying from college kids wanting their chance to strike it rich? The facts don’t point toward that conclusion.
MicroStrategy bets on Bitcoin
MicroStrategy is a publicly-traded business analytics and services company. On Aug. 11, 2020, the organization purchased 250 Million in Bitcoin to act as its primary treasury reserve asset[1]. CEO and founder Michael Saylor said, “This investment reflects our belief that Bitcoin…is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.” This historic event was the first time a listed company bought Bitcoin as a component of its capital allocation strategy.
Saylor appears to be a true believer in Bitcoin. So much so, that not only did the company re-up for another $175 million on Sept. 15, 2020[2], but the CEO himself owns $240 million of Bitcoin personally. In the short term, this appears to be paying off like a loose Vegas slot machine. Analysts estimate the move has made $133 million in profit for the company so far[3].
Square gets in the game
Mobile payment company, Square, increased its support of Bitcoin. Their popular mobile payment software, Cash App, has allowed users to transact in Bitcoin since 2017, but recently, the company has also made a significant Bitcoin purchase. On Oct. 8, 2020, they revealed a $50 million investment in the cryptocurrency. Amrita Ahuja, Square’s Chief Financial Officer, says, “We believe that bitcoin has the potential to be a more ubiquitous currency in the future…For a company that is building products based on a more inclusive future, this investment is a step on that journey.”
What about Bitcoin makes it so inclusive? Well, it’s becoming very popular in countries with shaky financial institutions. And although the price hasn’t exactly been stable over its lifetime, it represents a better store of value than some national currencies. For example, in Venezuela, the Bolivar’s inflation rate is estimated to reach 2400% this year[4]! With that kind of devaluation, it’s easy to see why some would prefer to hold their savings in Bitcoin.
PayPal allows users to purchase Bitcoin
Large corporate investments haven’t been the only newsworthy items about Bitcoin, however. In a surprise move, on Oct. 21, 2020, the payment processor, PayPal, announced it was adding features that allowed users to buy, hold, and sell Bitcoin and other cryptocurrencies. Although there are restrictions on how cryptocurrency bought via PayPal can be used and stored, it still represents a milestone. There are plans to loosen these restrictions in the future and allow for actual business transactions in cryptocurrency.
PayPal has nearly 350 million active accounts. Bitcoin being readily available to those people represents an enormous increase in visibility. It could result in the mainstream adoption of digital currencies. Only time will tell what the effects will be, but the demand already appears to be growing, as evidenced by PayPal needing to increase the weekly buying limit by 50%[5].
The future
So, is mainstream adoption driving Bitcoin’s price spike? Maybe. It’s difficult to argue that all this recent news hasn’t driven overall demand up. Bitcoin, and indeed all blockchain projects, have gained significant legitimacy since 2017. The appeal and demand may not dip as severely as back then, even during a market correction.
However, before you take out a second mortgage or empty the college fund to invest in Bitcoin, understand the risks. Sure, having publicly-traded companies buy Bitcoin sounds great for its future value, but consider that these organizations are accountable to shareholders. While tech-minded CEOs like Saylor and Square’s Jack Dorsey may be Bitcoin truthers, their shareholders aren’t likely to be as committed. If Bitcoin experiences a price drop, these companies could be pressured to sell their stakes quickly. They may not want to hold during one of Bitcoin’s famous periods of volatility. That could potentially lead to a mass sell-off, putting extreme downward pressure on Bitcoin’s price.
So, don’t invest more than you could stand to lose. It’s fantastic advice for any potential investor, whether they’re interested in Bitcoin, stocks, or real estate. Just be sensible.
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[1] “MicroStrategy Adopts Bitcoin as Primary Treasury Reserve Asset”, MicroStrategy, Aug. 11, 2020, https://ir.microstrategy.com/news-releases/news-release-details/microstrategy-adopts-bitcoin-primary-treasury-reserve-asset
[2] Paddy Baker, “MicroStrategy Buys $175M More in Bitcoin, Upping BTC Holdings to $425M”, Yahoo News, Sept. 15, 2020, https://www.yahoo.com/news/microstrategy-buys-175m-more-bitcoin-133032220.html
[3] Scott Chiplina “MicroStrategy’s Big Bitcoin Bet is $133 Million in Profit-up 32%”, Decrypt.com, Nov. 5, 2020, https://decrypt.co/47306/microstrategys-big-bitcoin-bet-is-33-million-in-profit-up-32
[4] Patriia Laya and Fabiola Zerpa, “Venezuela Planning New 100,000-Bolivar Bills Worth Just $0.23”, Bloomberg, Oct. 5, 2020, https://www.bloomberg.com/news/articles/2020-10-05/venezuela-planning-new-100-000-bolivar-bills-worth-just-0-23
[5] Nathan DiCamillo, “PayPal Raises Crypto Buying Limit to $15K/Week for ‘Eager’ Customers”, Coindesk, Nov. 2, 2020, https://www.coindesk.com/paypal-ceo-discusses-expansive-digital-wallet-plans-on-q3-earnings-call
