Why is the price of Bitcoin going through the roof?
As you may have noticed from the news, the price of Bitcoin has again been on the rise, hovering around US $50,000 lately. The price has in fact risen around 70% since the start of the year.
New Bitcoins are created through what is know as “mining”. Mining, in this context means using powerful computers to solve very complicated mathematical equations. Because it takes a lot of energy to create new Bitcoins in this way, the supply of new Bitcoins will continue to be limited. To get a better sense of the supply and demand for Bitcoins, in the second half of last year, nearly 150 thousand Bitcoins were mined while over 300 thousand were purchased. So, demand was more than twice the supply. So far this year the same trend has continued, which helps explain the reason for the significant price increase we have been witnessing.
Didn’t this happen before?
Anyone who follows cryptocurrencies is aware that their price can be very volatile with sharp price hikes and drops. You may recall that in 2017 the Bitcoin price went as high as $20,000 but the following year it lost over 80% of its value.
However, this time many investors feel the situation is different because part of the demand is being driven by sophisticated institutional investors. As an example, you may have heard that Tesla purchased $1.5 Billion in Bitcoins a few weeks ago.
This trend is another factor that explain the sharp price rise we have been witnessing.
We are seeing an increasing interest in Bitcoins and other cryptocurrencies from well established companies. This includes a few banks and even Mastercard who is reportedly planning to include Bitcoin in their payment network. Tesla, in addition to its recent Bitcoin purchase, has announced that it will also start accepting payments in Bitcoin.
We have already witnessed investment funds starting to raise capital in the form of cryptocurrencies, which will in turn be used to invest in companies operating in the traditional segments of the economy. While this is a relatively new trend and offered by only a few funds, there is no doubt that this is opening the doors to a new way of raising capital.
Even some local government authorities have announced that they are looking into using Bitcoin to pay part of city employees’ salaries and could even start accepting cryptocurrencies as payment for local taxes.
While it is uncertain if these ideas will actually be implemented, what is clear is that at the moment cryptocurrencies in general and Bitcoin in particular are getting a lot of attention from companies, governments and investors. Only time will tell if we are going to witness a repeat of what happened in 2017 or if this time things are really different.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.