Explosive Bitcoin growth: the cause and prospects

Last week, Bitcoin became more than $3,000 expensive reaching $69,000 and updating a record high. Many experts link the growth with the latest inflation statistics in the USA where they reached the maximum since 1990. The general nervousness in financial markets makes Bitcoin a kind of alternative to classic financial instruments. Other big cryptocurrencies also went up in price following Bitcoin. The market evaluation has topped $3,1 trillion again. Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin offers to find out what pushes the Bitcoin rate up and if the growth to $100,000 was possible, as some market players forecast.

Reasons for growth

Many think that the Bitcoin rate increased because of the launch of the ProShares Bitcoin Strategy ETF, the fund that is related to Bitcoin (BITO ticker). For reference, this fund opened on the New York Stock Exchange on 19 October and caused the recent wave of the rise in the cryptocurrency price. During the first trading days, the Bitcoin fund’s assets exceeded $1 billion. The fund broke a growth speed record to $1 billion, which had stayed for 18 years. The record belonged to SPDR Gold Trust (GLD ticker). In 2008, the trust raised $1 billion in three days. In early November, large Bitcoin holders who own from 10 to 100,000 BTC increased their Bitcoin investments by $2,8 billion in five days by buying 43,000 BTC. Active cryptocurrency savings might be the cause of a sudden growth of more than $3,000 in a day.

Anyway, inflation-related fears are the main reason. The launch of the ETF in itself cannot cause a new phase of money influx in the market. Investors started to consider Bitcoin as the best means of protection from inflation than gold, hence the outflow from gold ETF to Bitcoin funds. The growth of consumer prices in the world seriously concerns professional investors who have found another alternative to gold.

What’s next

There is an opinion that the cryptocurrency value will reach $100,000 by the end of the year. This is what CoinList’s CEO Graham Jenkin says. Judge for yourself, the Bitcoin rate is very volatile, the smallest troubles in the financial market have an impact on it. For instance, on 10 November evening, the rate fell to $62,000. The news about the possible default of the Chinese developer China Evergrande Group became the reason. Since bond interest isn’t paid, financial markets changed. The S&P 500 Index reduced by 0,82%. This dragged the Bitcoin price suddenly down and led to the liquidation of profitable positions for cryptoexchange users at $692 million a day. 172,000 traders’ deals were forcedly closed, the biggest losses were registered in pairs with Bitcoin — $193 million.

This fact isn’t a surprise but the reality of this asset — it crucially depends on hoaxes. Bitcoin doesn’t have a physical foundation but has investors and users’ trust. Ideally, it needs an information vacuum. Volatility explains sudden price fluctuations. From this perspective, it is a questionable and risky asset.

Some experts assume that Bitcoin grows because of fears of Ethereum blockchain’s expansion and high transaction fees. Also, a May fall took place amid large holders’ sale of coins. The same big players took advantage of the 50% price collapse, purchased Bitcoin cheaper and now are taking it to levels that are higher than previous records. Taproot’s upcoming upgrade, which includes Schnorr soft fork (the process of “soft” change in cryptocurrency’s source code when it isn’t necessary to completely change the OS of machines running in the blockchain network). The upgrade will allow creating complex smart contracts in the Bitcoin network. This will take Bitcoin very close to such projects as Ethereum. When it comes to its functions, confidentiality, expansion and efficacy of the Bitcoin network will significantly improve.

Will Bitcoin reach the bar of $75,000?

The expected upgrade will be the biggest since 2017. So there is a chance that Bitcoin will hit the bar of $75,000. The current upward movement has been developing since late 2020, considering the cyclic character of rate dynamics, the $75,000 is the next goal. At the same time, there might be some change and growth to $100,000. People’s behaviour in exchange and cryptocurrency markets isn’t different, the behavioural models are the same.

New exchange funds (ETF) can also become the further growth factor. For instance, Grayscale Investments filed for ETF, Grayscale Future of Finance. It will include blockchain-related shares of companies involved in buying, selling and mining cryptocurrencies, dApps and technical solutions.

BlockFi cryptoplaform submitted an application to the US Securities and Exchange Commission to launch a physically-backed Bitcoin ETF. The application reads that BlockFi NB Bitcoin ETF will reflect the underlying performance of Bitcoin as opposed to any futures or derivatives benchmark. This already speaks of the growing interaction between traditional financial markets and the cryptocurrency market.

The constant outflow of Bitcoin reserves from cryptocurrency exchanges is another moment that indirectly confirms that Bitcoin will not fall. In other words, people withdraw Bitcoins into their wallets to store them and expect higher prices.

To sum up, I would like to note that Bitcoin already escaped from different countries’ regulators’ pressure. For instance, the total ban in China didn’t influence the rate, though many had expected a fall. In this regard, the cryptocurrency absolutely justifies its initial purpose — to be independent of others, uncontrollable. One has to pay for such a privilege — the market has high volatility and dependence on false stories. For private investors, the best strategy would be to trade long-term, not to despair because of mid-term declines and bide their time. While better invest in Bitcoin stock exchanges.

Artur Safiulin

The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial.