Is bitcoin's 2020 rally another flash in the pan?

By Tom Wilson

Crypto analysts are split on whether bitcoin's rise this year is driven by unique factors or is just its latest bout of volatility. But many agree on one factor: an upcoming cut to the supply of bitcoin.

Bitcoin has soared by almost half this year, to more than $10,000, for the first time since October. On Feb 11, it hit its highest in five months.

The cryptocurrency's 11-year history is replete with fast ascents and equally rapid plunges. In late 2017, it rose three and a half times in just 35 days to reach almost $20,000. It then slumped 70% in seven weeks.

Such wild and often inexplicable swings are why bitcoin faces a struggle to become a functioning currency.

This time around, some market players point to a confluence of drivers not seen before. Arcane tech factors, expectations for mainstream acceptance and macroeconomic trends are leading markets to look again at bitcoin's worth, they say.

"You can argue that there is a fresh valuation going on," said Russ Mould, investment director at AJ Bell, a stockbroker that oversees assets worth $71 billion.

Most fundamentally, many cite growing demand for bitcoin before its latest "halving" -- a 50% cut in the production of the cryptocurrency due in May that is one of the few observable events known to materially impact price.

A rule written into bitcoin's underlying code slashes the number of new coins awarded to the miners behind the global supply of bitcoin.

In the year after the two previous halvings, in November 2012 and July 2016, bitcoin rose around by 80 times and four times respectively. The exact proportion of the gains caused by the halving is unclear.

"It's a rare observable factor - if you look at previous events, in each case there has been a quite clear and discernible spike in the value of bitcoin," said Windsor Holden, a payments consultant who tracks crypto and blockchain.

But others doubt bitcoin's latest rally is underpinned by anything more substantial than the previous booms.

"The recent rally has been driven by the usual hype cycle that we have very reliably seen every two to three years," said Michel Rauchs, author of several Cambridge university studies on cryptocurrencies and blockchain tech.

"We have these mini-bubbles, and the momentum that it creates - bitcoin first, then these other coins. It's a self-fulfilling prophecy."

Major cryptocurrencies that tend to move in correlation with bitcoin have also gained this year. Ethereum has more than doubled; Ripple's XRP token is up over 75%.

Other factors cited for the rally, such as greater demand for assets uncorrelated to mainstream markets following the U.S. killing of an Iranian military commander last month, are also questionable.

Bitcoin's "safety" characteristic is unclear. It has regularly fallen in times of geopolitical stress in recent years.

Looser central bank policy is also given as a reason bets on riskier assets. But that link is hard to prove, too. Bitcoin has fallen during previous spells of easy money.

Also widely cited are expectations that cryptocurrencies will go mainstream, as central banks step up their research into digital currencies after Facebook's push to offer its Libra coin. Some, such as China's, are getting closer to issuing their own coins.

And in comments that traders said stoked buying in bitcoin, U.S. Federal Reserve Chairman Jerome Powell told U.S. lawmakers on Tuesday that the Fed was "working hard" on the issue, while it remained undecided on any digital dollar.

Central bank interest is also problematic as a reason for bitcoin's rise, Rauchs said.

"People tend to mix up and conflate these different concepts that are actually fundamentally different from one another," he said. "This creates a bubble where you conflate everything together and everything appreciates."

Still, in the short term, crypto traders interviewed by Reuters said, the cut to the supply of bitcoin was likely to loom largest for investors.

"Things are aligning," said Jamie Farquhar, portfolio manager at crypto firm NKB Group. "But the real thing that people are looking at is the halving."

© (c) Copyright Thomson Reuters 2020.

©2020 GPlusMedia Inc.

Login to comment

Bitcoin is anything but decentralized.

Close to 70% of the mining is done in China, with 54% of it in just one province.

One Chinese company alone, Bitmain, controls close to 40% of the hash power. That same company controls 70% of the market for the mining rigs. Even the new "supermine" facility in Texas being built is owned by Bitmain.

Once the halvening hits in May, Bitmain's market power will further increase as smaller, weaker miners will be put out of business.

Bitcoin might as well be called Bitmaincoin.

1 ( +1 / -0 )

Bitcoin is anything but decentralized.

You clearly don't know what decentralized means in this context, because you're trying to tell us the sky is green, when it's clearly not.

0 ( +0 / -0 )

Until/unless it stabilizes, bitcoin will have these fluctuations, but the highs will gradually decrease, and the drops will gradually lessen, until it becomes more stable. As it stabilizes, more businesses will accept it as a currency, and less people will use it for speculation.

That's if Bitcoin wins, and not some other blockchain implementation.

1 ( +1 / -0 )

Ahh Bitcoin.

On a side street in Vietnam I saw a vending machine exchanging U.S. dollars for Bitcoin.

I'm sure it's legit and a great investment too. :)

0 ( +0 / -0 )

As it stabilizes, more businesses will accept it as a currency, 

We've been hearing that for 5 years now.

Bitcoin used to be accepted at Yodabashi and such, I don't think it is anymore, they dropped it because absolutely nobody used it.

Transactions can cost 30 dollars and take 20 minutes to process.

The network itself can only handle something like 17 transactions per second globally.

What a joke.

0 ( +0 / -0 )

It warms my heart to see there are still naysayers peddling misinformation. Means there is still time to buy cheap before people learn.

0 ( +0 / -0 )

Login to leave a comment

Facebook users

Use your Facebook account to login or register with JapanToday. By doing so, you will also receive an email inviting you to receive our news alerts.

Facebook Connect

Login with your JapanToday account

User registration

Articles, Offers & Useful Resources

A mix of what's trending on our other sites