How long can Bitcoin run wild
Reporter Tian Yuan
At the beginning of the new year in 2021, Bitcoin has ushered in a jaw-dropping rise, attracting the attention of global capital markets.
Since New Year's Day, the price of Bitcoin has reached highs of US$34,000 and US$40,000, pushing the total market value of the cryptocurrency market to exceed US$1 trillion.
Overseas investment institutions have also strongly divided their views on Bitcoin. Some believe that factors such as the weakness of the US dollar, the risk of increased inflation, and the entry of institutions have pushed up the price.
But there are also points of view that reminded that this round of rapid rise has accumulated bubbles and speculation risks are huge.
Rapid fluctuations
Looking at Bitcoin's performance in 2020, except for the cliff-like plunge in late February, it has experienced 5 rounds of rapid rise, especially since the bottom of the low of $3,850 on March 12 last year, the market can be said to be advancing all the way. .
Data from the "Bitcoin Table" website shows that the return on Bitcoin investment in 2020 will be several times that of the S&P 500 Index and gold.
As early as the first week of 2020, investors speculated that intensified geopolitical turmoil might stimulate demand for cryptocurrencies. Expectations that Bitcoin might become a safe-haven asset similar to gold gradually strengthened, and the price of Bitcoin jumped to $7,300.
Starting in October 2020, compared with the mediocre performance of other assets, especially the continued weakness of the U.S. dollar, the narrative of Bitcoin's “digital gold” has been increasingly strengthened among institutional investors, supporting its successive record highs.
This verifies the 2017 prediction of JPMorgan Chase CEO Jamie Dimon that “even if it is moderately excluded as an alternative to gold for a long period of time, the price of Bitcoin will still rise”.
Today, traditional financial "predators" such as JPMorgan Chase, Morgan Stanley, Tudor Investments, and Blackstone have begun to get together.
The multinational payment company PayPal announced that it will allow its 346 million customers to hold bitcoin and other cryptocurrencies and use digital assets to shop at 26 million merchants on its network.
A report by the foreign exchange and cryptocurrency analysis company "Quantum Economics" at the end of October 2020 believes that PayPal's move "is likely to become a watershed when Bitcoin enters the mainstream."
Risks are highlighted under the skyrocket
Some overseas investment institutions believe that this round of rising is not only a strong push from actual demand, but also a clear logic of historical evolution.
On the one hand, the global spread of the new crown pneumonia epidemic has increased investor demand for hedging.
Due to the impact of the epidemic in 2020, the global economy has experienced the largest decline since World War II, and international financial risks have subsequently accumulated to a record high.
Tracing back to the origin of Bitcoin's birth, we can find that it has a natural connection with anti-inflation.
Bitcoin is a virtual encrypted digital currency proposed by Satoshi Nakamoto, who is said to be a Japanese American, on November 1, 2008. It was born on January 3, 2009. It was initially set to be only available online "Mining" generates a total of 21 million rules.
This decentralized digital currency was designed from the very beginning to counter the inflation caused by the government over-issuing legal tender.
The supply ceiling and the law of halving issuance every four years give it a certain degree of anti-inflation ability, which contrasts with central banks that have to over-issue currencies and stimulate recovery under conditions of zero or even negative interest rates.
Under the impact of the epidemic, banks, insurance companies, and financial institutions have begun to embrace the cryptocurrency market, including Bitcoin, on a large scale due to the need to hedge against inflation risks.
Bitcoin's market value can quickly reach the current height, mainly because institutional funds have replaced global retail investors.
After confirming the purchase of Bitcoin worth more than 745 million US dollars, the British Ruover Investment Company issued a report saying, "The current macroeconomic environment has set a perfect environment for this asset that combines the advantages of technology and gold. Negative interest rates and extreme monetary policies. , Inflated public debt, and dissatisfaction with the government all provide a powerful boost to investing in Bitcoin.”
Jeff Doman, chief investment officer of Alka Fund, which focuses on crypto assets, believes that "in a long period of time, the devaluation of any other currency will strengthen the purchasing power of Bitcoin."
In addition, the credit of the US dollar has been widely questioned and has strengthened the willingness to diversify assets.
Before the new crown pneumonia epidemic hit, with the US dollar's global reserve currency status and the Federal Reserve's long-term ultra-low interest rate policy, the US government and US-owned companies issued huge amounts of debt to allow the world to share its costs.
As of September 30, 2020, the US government’s budget deficit has soared to a record high of 3.1 trillion US dollars.
Many observers warn that this kind of debt is unsustainable-once the crisis comes, "money printing operations" such as quantitative easing will appear again, and the dollar's currency credit is bound to decline or even be overdrawn.
However, in 2020, the largest "money printing operation" in the history of the Federal Reserve has not stopped. At present, monthly purchases of national debt and government-backed mortgage bonds are still as high as 120 billion US dollars.
This intensified global investors' concerns about the credit of the US dollar, and the US dollar and US dollar assets have also fallen to their lowest levels in recent years.
However, the risks of Bitcoin cannot be ignored.
A cryptocurrency research institution warned that the current active Bitcoin accounts are close to the highest level in history at the end of 2017, which may be a signal of some investors to sell.
And historically, Bitcoin has also staged big ups and downs many times.
For example, in December 2017, the price of Bitcoin once broke a historical record, reaching a high of $20089, but it fell by more than 50% a month later.
Analysts warn that investors should be wary of speculative risks in the Bitcoin market.
This is because the Bitcoin market is still small and easy to manipulate; on the other hand, it is because the world has not yet established a sound Bitcoin market supervision mechanism.
It is foreseeable that in 2021, the Bitcoin market will still be haunted by labels such as automated market makers, huge volatility, ultra-high yields, anti-fiat currency, and the central bank system.
Preventing excessive speculation of Bitcoin and thereby pushing up systemic risks should become the shared responsibility of global financial regulators and market participants.
Reporter Tian Yuan