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Is Bitcoin Having a Moment or is the Cryptocurrency Future Really Here?

Thursday, January 14, 2021 04:34 PM | Neal Farmer
Is Bitcoin Having a Moment or is the Cryptocurrency Future Really Here?

People’s favorite cryptocurrency has been on a wild ride over the past year and, really ever since it was invented.

Bitcoin’s History

Bitcoin was invented all the way back in 2008 as an innovative payment system that operated under no central authority or bank. It has become quite the phenomenon at this point. There are now lots of new crypto currencies and a nascent industry around the idea of the blockchain, even if a lot of these new blockchain applications  a banking system that uses peer-to-peer technology and no one individual or corporation owns.

Bitcoin experienced its biggest pop in price in 2017 when the value increased from below $1,000 at the beginning of the year to almost $20,000 by the end. However, market sentiment quickly shifted and the price retreated to $3,000 by the end of 2018.

Investors were mainly concerned with what the actual use for Bitcoin was. A product should solve a problem or improve upon an existing service but Bitcoin was not being widely used as a currency to purchasing goods and services outside of a few, mostly online, businesses, and some transactions on the dark web.

Since it wasn't being used as expected, Bitcoin essentially became a gambling vehicle where investors speculated on the future price movement as opposed to investing into the actual product and betting that it will succeed.

What’s Happening Now

Fast forward to today, once again, Bitcoin is experiencing a surge that rivals 2017 and may eventually surpass it. Bitcoin started 2020 at about $7,300 and fell along with the stock market after the pandemic hit. It traded below $5,000 back in March, which doesn't exactly give credence to the idea it is an uncorrelated asset or a stable store of value. Since that low, Bitcoin has recovered about as well as any asset and set a new high at more than $40,000 just this week.

Bitcoin climbed steadily after that March low but the price didn't really begin to pop until October. That when amid a weakening dollar the dollar weakened,  usually skeptical Wall Street analysts joined the perma-bull bitcoin analysts in recommended the cryptocurrency. At the same time, PayPal began accepting Bitcoin as a form of payment, lending some extra legitimacy to the currency as that should promote its use for actual payments. Bitcoin was near $10,000 in October and did not meet much resistance until late November when it neared its previous all-time high near $20,000 from 2017. Once it surpassed that mark though, it shot upwards even faster as it entered the price-discovery process.

Trading Trends/Outlook

That is where we are today. Bitcoin's price is now nearly ten times what it was at its lowest this year and investors speculate on where Bitcoin is going. The currency has met some resistance around $40,000, which continues a pattern of the price finding resistance at $10,000 intervals. Bitcoin traded right around $10,000 when it started to take off until taking a bit of a breather at $20,000. Again once it surpassed $20,000 it then soared upwards until $40,000 although it met met some minor resistance around $30,000 along the way. Most recently it dropped after breaching $40,000, but was met with support around $30,000 and is now trading back near the $40,000 mark.

It seems as though this will continue to be a trend as investors use these milestones as points to either take profits or buy back in. Assuming the pattern continues, $50,000 might offer even more resistance, although some some analysts have a price target of $100,000 for Bitcoin. These analysts cite an increased imbalance between supply and demand due to the number of bitcoins awarded to miners being cut in half back in May.

The reality is, Bitcoin trades entirely on sentiment as there are enough people using it as money for that activity to have an effect on the price. No one is going to their favorite coffee shop and buying a cup for 0.0001 BTC or ordering a new pair of Nikes and paying in Bitcoins because it isn't an available option. PayPal offering it is a positive development, but even then, the vast majority of "bitcoin" payments through Paypal are converted to dollars for a purchase.

Wrapping Up

In the end Bitcoin seems to be right where it's always been, a speculative bet on whether or not people will keep buying bitcoin, and not an investment in a growing technology.

PayPal could be is the beginning of a trend of companies accepting the currency, but until it gains widespread adoption, and some price stability, Bitcoin will continue to be a speculative investment more than a store of value. Even still, that doesn't necessarily mean it's a poor investment or that it will never become a relevant currency. Portfolio managers who invested in Tesla at the beginning of 2020 hold assets in a ridiculously overvalued company but that doesn't mean it has been a bad investment.

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