Bitcoin has had a spectacular rally since 2020. The price dropped below $4,000 when the World Health Organization (WHO) declared Covid-19 a global pandemic. Since then, the price has jumped to a record high of near $70,000. In all, it rose by more than 1,700% between March 2020 and November 2021. So, is this the best time to buy Bitcoin?
While Bitcoin has soared since March 2020, its remarkable rally goes beyond that. As you probably know, a decade ago, Bitcoin was trading at less than $10. In its first major rally, the coin jumped to almost $20,000 in December 2017.
It then crashed hard the following year as previous investors took profit and as the Federal Reserve turned extremely hawkish. Indeed, the bank implemented four rate hikes in 2020, which also led to the overall underperformance of stocks.
There are several reasons why Bitcoin has been in a strong rally recently. First, in its response to the Covid-19 pandemic, the Federal Reserve and other global central banks launched their most aggressive easing policy ever. The Fed lowered interest rates to zero and launched a giant quantitative easing policy.
Indeed, the bank has expanded its balance sheet by more than $4 trillion. Other central banks like the European Central Bank (ECB), Bank of England (BOE), and Bank of Japan (BOJ) announced significant easing.
Low-interest rates tend to have a positive impact on risky assets like cryptocurrencies and stocks. Besides, with interest rates so low, investors usually turn to risky assets to generate returns.
Second, in addition to central banks, governments unveiled their most ambitious fiscal stimulus on record. In the United States, Congress has offered more than $6 trillion in stimulus. The same has happened in other countries like Japan and those in the European Union.
Most of the recipients of these funds funnelled them to cryptocurrencies like Bitcoin and Ethereum, which helped to push them higher.
Third, Bitcoin prices jumped because of more interest from institutional investors. In the past few months, more companies and well-respected investors have moved some of their cash to Bitcoin. The most aggressive buyer has been MicroStrategy, a business intelligence firm that has become the biggest Bitcoin holder in the world.
Other companies that have embraced Bitcoin are PayPal, Square, Ark Invest, and MassMutual. Other companies like Walmart and Amazon have also expressed their interest in the currencies. At the same time, prominent Bitcoin mining companies like Riot Blockchain and Marathon Digital have gone public.
Fourth, Bitcoin price has risen because of the role of exchange-traded funds (ETFs). A few weeks ago, the Securities and Exchange (SEC) accepted the first Bitcoin futures ETF. This has led to more proposals of ETFs. As such, analysts believe that this launch will lead to more adoption by institutions.
There are other reasons why Bitcoin has risen. For example, demand for the currency has jumped sharply recently as evidenced in the rising hash rates and difficulty of mining. Also, the recent Taproot upgrade was welcomed by investors who believe that it will improve the network.
While Bitcoin is a relatively risky asset, it has a long way to go and its returns will be better than those of traditional assets like gold and stocks. First, for more than a decade, Bitcoin has proven that its underlying technology works. While exchanges like Mt. Gox has been breached, Bitcoin’s technology itself has remained safe.
Second, while Bitcoin has surged sharply in the past few years, its adoption among large investors is still relatively low. Indeed, most institutional investors have stayed away from Bitcoin. This means that its price will likely rise as these investors embrace it as a safe asset. Indeed, Bitcoin’s volatility has declined in the past few months, meaning that these investors will be comfortable buying it.
Third, the cryptocurrency industry is going mainstream. For example, venture capital firms have allocated billions of dollars into crypto firms. According to TechCrunch, there are more than 60 crypto unicorns today. This means that the industry is growing.
Additionally, Bitcoin’s role as an inflation hedge will continue. In the past few months, inflation in most countries like the US has risen to multi-year highs. Therefore, more investors will likely move to Bitcoin as a way to hedge against inflation. This is mostly because many investors see Bitcoin as a better asset than gold.
Bitcoin has had a remarkable rally in the past decade. During this time, it has outperformed all traditional assets like gold and the S&P 500. While past performance is not an indication of what will happen in the future, there is a possibility that BTC will continue doing well. This means that allocating a small amount of funds to Bitcoin makes sense for long-term investors.