Is a new Bitcoin price bubble blowing up?

Published On: November 19, 2020Categories: Stocks & Shares3.2 min read

A combination of the Covid-19 pandemic, U.S. presidential election, post-election Trump meltdown and all the other drama 2020 is throwing at us may have kept it out of the news, but the Bitcoin price is soaring again. The exchange value of a single Bitcoin has breezed past the $18k level today, having barely glanced at the $16k and $17k in its price rise this week.

Bitcoin looks like it could well see its price double in value since embarking on its latest stratospheric rise since late September. But is the original cryptocurrency in a new price bubble that will again see its exchange price crash back to Earth in coming weeks and months? Or is something more significant and long term afoot?

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Bitcoin’s gains for 2020 are now approaching 140%. The original cryptocurrency is up over 400% since its March low when caught up in the broad flight to safety as Covid-19 panic gripped financial markets. Since then, like stock markets, especially the tech sector, Bitcoin has spent the rest of the year in a strong bull market.

With the upwards momentum gathering pace in recent weeks, Bitcoin is now at levels last seen in January 2018. Unless some serious resistance is met before the end of the week, it could well set a new record high, surpassing its $19666 value of December 2017.

Are there any obvious catalysts or fundamental factors, such as new ‘real world’ ways to spend Bitcoin? Or are we seeing a new bubble doomed to pop all over again? JP Morgan analyst Nikolaos Panigirtzoglou ties the resurgence in Bitcoin’s fortunes directly to the coronavirus crisis:

“The virus crisis is propagating the reassessment of bitcoin. There is a reassessment about its value here as an alternative currency, as an alternative to gold.”

“Alternative to gold”, is the key phrase here. There’s no immediately obvious reason why Bitcoin is surging as part of the ‘tech sector’. Cryptocurrencies are not being spent more frequently in ‘real world’ transactions. There’s still very few retailers or other kinds of business willing, or able, to accept Bitcoin as an alternative to traditional fiat currencies.

Not least because the cryptocurrency is still far too volatile in its value fluctuations for many businesses to be willing to take on the risk. Yes, $1000 worth of Bitcoin could quite easily be worth $1200, or $1500 within weeks or even days. But it could also be worth $800 or $500 just as quickly. Hard to hedge against that level of volatility!

Rather, Bitcoin is back in vogue due to worries about fiscal currency debasement as a result of the huge amounts of money printing again happening at central banks around the world in an attempt to keep the world and national economies afloat.

The optimistic view is that because everyone is printing money with abandon, the rising supply of the major currencies will cancel each other out. The pessimistic view is that we’re laying the ground for a period of high inflation and plummeting purchasing power of fiat currencies.

Because Bitcoin and other cryptocurrencies have a fixed total number that can ever exist, which are released into the system slowly as payment to the ‘miners’ who dedicate computing power to verifying transactions, proponents see them as a better alternative to fiat currencies. The latter’s relative value can be manipulated by central banks and government policy.

Gold has traditionally been viewed as a hedge against inflation and currency debasement for the same reason. Bitcoin has become a gold alternative for the digital era.

Until now, Bitcoin has just as quickly slumped in value after its previous surges. Will that happen again this time? My guess is yes. But the cryptocurrency does keep coming back, like a bad digital penny. It refuses to disappear after each bubble bursts. And last time, while it gave up much of its gains, it still regrouped at a much higher value than the $1000 it had started 2017 at.

We could be in a pattern of boom and bust, which sees each bust leave Bitcoin at a more valuable exchange level than after the previous. And that tenacity and two steps forward, one step back, pattern, could eventually lead somewhere.

About the Author: Jonathan Adams

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