Episode 3 – Why is Bitcoin so hot right now?
“In the immortal words of the mighty Mugatu, Bitcoin is so hot right now. But what’s going on? Who lit the fire? And are you too late to jump in?
Fear not. You’ve found School of Block and, yes, we have the answers.
In our last episode we gave you the lowdown on what cryptocurrencies are and as different as they all every single one of them follows the lead of the mightiest crypto of them all, Bitcoin and 2021 has been pretty much a Perfect Storm for Godzilla. Here’s why:
Firstly, the bitcoin price action is CYCLICAL – every four years the rewards miners receive for mining blocks are cut in half- an event creatively known as “The Halving”, and this means less bitcoin is being released into the market. It takes a little while for the market itself to absorb this information but usually around 6 months later the price begins to rise and then it explodes.
It’s simple economics. When demand is greater than supply, price increases. This is how it happenedin 2013 and in 2017. People expected history to repeat itself in 2021. And it has.
But this time’s also different – because when it comes to what’s creating the DEMAND, there’s a whole raft of new drivers. And they’ve all turned up at exactly the right point of the cycle to make Bitcoin’s price action a perfect powderkeg of pump.
The first driver is DEMOGRAPHICS. Millenials and Zennials are all over digital money. It makes perfect sense to them. They barely know what cash even is. And now, 12 years after bitcoin’s birth – they’re not just consumers, they’re decision makers and influencers in social media, business and even government.
And cash itself is staring down a deep existential crisis. Post pandemic, poor physical cash is unhygienic and unloved – accelerating the trend towards DIGITAL PAYMENTS. And what’s really the difference between tapping your card on a reader or scanning a barcode with your phone? Very little.
So it’s not surprising that existing payments platforms are racing to adopt bitcoin. PAYPAL joined the party in late 2020 and within weeks 65% of their users, who transact almost a TRILLION dollars annually, said they’d use bitcoin to make payments.
But here’s the mad thing about Bitcoin – it’s not just money in your pocket, it’s also the best performing asset in the world since its inception. It’s a STORE OF VALUE, it’s – wait for it – DIGITAL GOLD.
Finally in 2020 we saw previous bitcoin skeptics all over the world seeing the light and changing their tune. INVESTMENT BANKS and HEDGE FUNDS finally relented under pressure from their clientele to include bitcoin in their portfolios. Black Rock, JP Morgan, Citigroup, Goldman Sachs, all came round to sing bitcoin’s praises despite the likes of Jamie Dimon previously calling it a fraud… very vocally and very publicly. Citigroup even put a $300k price target on bitcoin’s head.
And it makes sense – Bitcoin price experienced an unprecedented rise in value since 2009 – blowing traditional assets like silver and gold into the water.
And demand for those assets is increasing as governments around the world print money hand over fist. Their attempt to avert economic collapse in the face of an unrelenting global pandemic has an unwanted side effect – and you don’t need to remember your Year 10 economics to work out what it is. INFLATION.
This kind of money printing hasn’t been seen in decades, and it has investors around the world scrambling to invest in scarce assets as a HEDGE against that INFLATION. And what’s more scarce than an algorithmically limited cryptocurrency, capped at 21 million units? Not gold, they’re mining more of that all the time. No hard cap on those guys with the pickaxes, bar the ones on their heads.
This macro-economic climate is a HUGE driver of funds towards bitcoin – and unlike in 2017, this time major institutions can actually buy Bitcoin. Custodial issues back then stopped the billion dollar buys, but not now. Companies like Grayscale and Square enable pension funds, endowments and other institutions to have the exposure to the bitcoin market they need to prop up their portfolios, and in turn buy monumental amounts of it over the counter to satisfy that demand.
And the worry around governmental regulation – CHINA BANS BITCOIN! – that dogged the last bull run is largely absent in 2021. Governments have now worked out how to tax it, and it turns out they’re really rather keen on the transparent blockchain thing. So the REGULATION that has emerged has generally LEGITIMISED crypto, and in fact has enabled those larger institutions to consider it – and Bitcoin in particular – as a valid new asset class.
Billionaire hedge fund manager Paul Tudor Jones, for example, considers bitcoin to be drastically UNDERVALUED relative to gold. That’s the space bitcoin now sits in.
But wait you shout, hasn’t Bitcoin pumped massively already, almost doing a 10x in 2020 alone? It’s surely tapped out?
Well let’s look at the size of the space it occupies. Right now there’s THREE HUNDRED TRILLION DOLLARS worth of investments worldwide.
TEN TRILLION of those are in gold. NINETY FIVE trillion of those are in stocks. And 0.97 a trillion in BITCOIN.
How’s this pie going to be redistributed in the future when new generations take leadership positions? The ingredients might be all over the kitchen surface, but this pie’s not gone in the oven yet.
And the fact is, not only do millenials and gen Zs view Bitcoin as digital gold, it’s also the RESERVE CURRENCY of an ecosystem that could disrupt industries from insurance, to law, real estate and even healthcare.
Bitcoin is just the tip of the spear. The cryptocurrency space is truly the frontier of digital innovation, and all of it relies on bitcoin.
Remember all of those dubious financial products that created the 2008 financial crash? Credit default swaps, sub prime mortgages, pathetic premium bonds, payment protection insurances, complex derivatives based on fictional assets? Well if you want your money to work hard for you, but don’t want assets made of cheese that will ultimately spawn numerous Hollywood blockbusters, then crypto’s got that too. Decentralised Finance, or DeFi. Smart contracts. No cheese. This really is a brave new world, and it’s only just beginning.
But WHOAH THERE NELLY. The savvy crypto-connoisseur knows there are still plenty of BIG questions.
Will Bitcoin really become the digital peer to peer cash system of choice? Or will other cryptos that already beat it on transaction time and fees finally usurp the power of the King’s network effects? And how much of a store of value can we really place on an asset that has such wild price volatility? And what if we suddenly find ourselves without electricity and the means to transact?
Big questions with increasingly complex answers. We were so intrigued by the last one that we decided to go full doomsday apocacrypto and switch the lights off. Turns out you can still send Bitcoin without access to electricity BUT boy was it a struggle, so stay tuned for that one!”