Bitcoin’s eye-popping run beyond the psychological $20,000 level has turned profits for almost everyone who invested in the cryptocurrency to date. Also, BTC has appreciated by more than 500 percent this year since the March lows. It is currently among the top investable assets across all financial markets. But what exactly fuelled bitcoin’s rally past the 2017 top? What’s the force behind BTC’s parabolic spurt this year?
Death Of The Dollar (Not Yet But The Writing’s On The Wall)
The 1D YTD chart of the U.S. Dollar Currency Index below confirms the greenback’s road to perdition and reaffirms the fact that it’s time as the world reserve currency is about to get over.
Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, also talked about it explicitly in one of his public commentaries. He explained how the U.S. Dollar has enjoyed the ‘world reserve currency status’ for 100 years now and how the federal government abused the greenback’s financial market dominion. And how bitcoin could now become the global reserve currency.
US officials were thus confident that, in response to the Covid-19 lockdowns, they could print the dollar in limitless quantities without undermining its reserve currency status, allowing the country to keep running large deficits without apparent consequences.
And how has this played out for the American fiat currency? Massive US COVID-19 stimulus deals have put pressure on the U.S dollar. Ever since the first stimulus checks started getting deposited, the greenback has only trended downwards. The Dollar Currency Index plunged to eventually hit its 2018 low last month.
This has only boosted bitcoin’s bullish case. And this can be clearly estimated by the explosive growth registered by BTC after it took off in April. Investors flocked to park their wealth in the top cryptocurrency to hedge against the greenback’s continuous free fall. Finally, talks of further fiat injection totally turned the tides in BTC’s favor allowing it to chart new highs above the $20,000 level.
The latest $900 billion stimulus deal agreed between US lawmakers might land a final blow to the greenback and help BTC rally up higher.
The Entry Of Institutions In The Bitcoin Market
What publicly-traded multinational organization MicroStrategy started is slowly rubbing off on other corporations as well. The Michael Saylor-led company shocked the world with the conversion of $425 million worth of cash reserves to bitcoin.
Saylor, initially, was a BTC skeptic and had said in 2013 that the flagship cryptocurrency’s days are numbered. Today he is one of the biggest proponents of bitcoin. And his company didn’t just stop at $425 million. This month MicroStrategy purchased an additional $700 million worth of BTC.
Along with MicroStrategy, Twitter boss Jack Dorsey’s payments company Square bought $50 million worth of bitcoin earlier in October this year. MassMutual – an insurance company based in Boston, Massachusetts hedge fund giants One River Asset Management, and Ruffer Investment also didn’t stay behind.
Guggenheim Partners bought BTC when the asset’s price was trending at $10,000. The firm’s CIO, Scott Minerd, even went ahead and said that bitcoin’s price should be at least worth $400,000.
Also, Anthony Scaramucci’s billion-dollar hedge fund, SkyBridge Capital, filed a Form D with the U.S. SEC for its first bitcoin fund and has already put $25 million in it.
Institutions are the primitive force behind BTC’s incredible rally this year, and massive fund inflows from these deep-pocketed firms and organizations are what’s keeping the rally intact.
Halving 2020 & Grayscale Gobbling
This year, Bitcoin experienced its third block reward halving in which BTC rewards for miners were slashed in half, owing to the original design of the cryptocurrency’s protocol. Bitcoin miners will now be able to make only 6.25 BTC for solving a block.
Reduction in the rate of bitcoin production points to an inadvertent slashing of supply. And since the market is rife with demand, the halving that happened in May this year further added fuel to bitcoin’s rallying price. Also, what has added to bitcoin’s supply paucity is the sheer buying activity from crypto investment fund Grayscale.
The Barry Silbert-led institutional investor-focused digital asset fund has been consistently growing its AUM base. If the latest numbers are anything to go by, Grayscale currently has over $15 billion worth of cryptocurrency assets under management. Most of the firm’s holdings are in bitcoin.
12/21/20 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
— Grayscale (@Grayscale) December 21, 2020
This has greatly reduced the probability of potential investors to pick up cheap BTC in the market as Grayscale’s gargantuan BTC buying behavior combined with premium laced selling of its BTC shares has contributed to a significant rise in the first cryptocurrency’s value.
More Skeptics Turning Believers
The incessant printing of money by central banks around the world has resulted in notable financial experts and billionaire Wall Street investors projecting a grim, inflation laced outlook for the global economy.
What has also happened is that these folks who previously were staunch denigrators of Bitcoin have now warmed up to the idea of the cryptocurrency being an actual store-of-value.
The latest and the most notable amongst the converts is Ray Dalio. The billionaire hedge fund manager and founder of Bridgewater Associates recently softened his stance on bitcoin. He went from dismissing BTC as a currency and store of value to admitting that the crypto-asset could be an alternative to gold.
Similarly, the ex-CEO of Prudential Financial and the chairman of Sanders Morris Harris George Ball, who was well-known for criticizing Bitcoin, became a convert earlier this year. He said that the top cryptocurrency is an amazing long-term investment bet.
He said then that ‘traders and investors should realign their portfolios substantially,’ and allocate sections of their portfolios to bitcoin because it is
“…something that can’t be undermined by the government, and it won’t become worthless…”
This soft spot for Bitcoin coming from important folks who initially had a hard-on is driving investment sentiment consequentially leading people and companies to buy more BTC, which, in turn, is a significant reason for the blast past $20,000.
Retail Investors Are FOMOing In
In the last one year, search interest in the keyword “bitcoin” has appreciated thrice. This indicates that retail pockets are ready to come in in big numbers.
But what’s interesting is that even with relatively low search interest, BTC price has spiked through the roof. However, it is mostly a result of institution-driven buying momentum. When the retail FOMO finally kicks in, it’s going to be fireworks.
People Are Buying Bitcoin To Participate In The DeFi Market
The Ethereum-based decentralized finance market has experienced unprecedented growth this year. Thanks to the yield farming craze. But what’s even more noticeable is the growing supply of tokenized bitcoin on Ethereum.
The above graph shows how people have amassed tokenized BTC assets in exchange for the real coins to access several DeFi protocols related to lending, borrowing, swapping, etc. This has created buying pressure in spot bitcoin markets, thereby resulting in an appreciation of BTC’s value against the US Dollar. The number of bitcoins on Ethereum is currently above 140,000, which gives a valuation of $3.3 billion to the BTC-on Ethereum ecosystem.
The contribution of bitcoin buying for tokenized BTC conversion in the rally above $20,000, if not dominant, is at least to be considered.