Despite falling over 50% overnight during the beginning of 2020’s recession, Bitcoin has climbed back to a total return of 228% YTD.
Compared to S&P 500’s underwhelming 16.43% YTD return and even gold’s mediocre 32.43% YTD return, we can see that Crypto has outperformed all other assets in the market.
Bitcoin was worth less than a dollar when it first debuted. The cryptocurrency is now worth over $40,000 after 10 years, with an enormous market capitalization of $750 billion. But what exactly is Bitcoin, and why are cryptocurrencies, in general, such valuable assets to own today?
The Origin of Cryptocurrency
The first form of digital currency was Bitcoin. Bitcoin was created in 2009 by Satoshi Nakamoto, a pseudonym of a person/group that remains a mystery today. Its initial purpose was to revolutionize the transfer of currency in getting rid of a middleman, which normal currencies require in the form of a bank. The creator(s) of bitcoin had this vision to conventionalize payment by replacing it with a system backed up by people all over the world. Decentralizing the authoritative power of regulating transactions while maintaining the integrity of the system was a novel idea and is already being implemented throughout many companies’ financial systems.
What gives Bitcoin its value?
Like traditional paper money, cryptocurrency does not hold any intrinsic value. Then why is Bitcoin selling at tens of thousands of dollars per coin? The value of Bitcoin lies in its blockchain technology. Put simply, Bitcoin allows transactions to be able to be verified without the need of a third party. With blockchain technology, peer-to-peer transactions will become much more convenient than current systems backed by banks. The decentralized system also provides immense value. Basically, what Bitcoin miners are doing is verifying the legitimacy of individual Bitcoin transactions. These miners are then rewarded with units of Bitcoin when they complete these cryptic transactions, which take large amounts of work computationally. Despite the lack of an overseeing figure like a bank, Bitcoin ensures that transactions with the currency are verified with these miners. As the number of miners increase, so does the security of their network. Because of this, analysts may prefer the integrity of cryptocurrencies over traditional paper money. You can delve deeper into the specifics of Bitcoin mining here.
The second reason why Bitcoin is considered valuable is because of its hedge against inflation. While dollar values may begin to depreciate due to increased money supply, the supply of Bitcoin remains at a stable 21 million, which means that its scarcity gives Bitcoin a hedge against inflation. The current Bitcoin protocol limits the total supply of bitcoin to 21 million, and approximately 18.5 million have been mined already. About 900 Bitcoin are mined daily, which means that there could be seven more years until bitcoin supplies have been depleted. Once the last bitcoin has been mined, miners will still process transactions with fees attached to them, which will be their new incentive instead of being rewarded with the cryptocurrency itself.
Is Bitcoin a Safe-haven Asset?
Bitcoin was initially known to be a safe-haven asset like gold, which recessions are less likely to affect adversely. But the size of the 2020 recession hit all asset classes hard. Gold dropped from USD 56,000/kg to less than USD 48,000/kg in just a week, while Bitcoin dropped from $8,000 to less than $5,000 in a couple of days after the pandemic. Even then, it’s difficult to predict the movement of Bitcoin relative to other asset classes. While it has shown a positive correlation during October, it has also reached a -30% correlation at certain points as well. Analysts are still scratching their heads over the role of cryptocurrency in the market.
This didn’t stop Bitcoin from climbing to the levels that it is at today. While the US has raised trillions to help households and businesses stay afloat, investors flocked towards Bitcoin as a hedge against inflation. As all asset classes and the US dollar lost more and more value, Bitcoin became a great store of value due to its limited supply at 21 million. Bitcoin has more than recovered its losses during the pandemic, and it’s sitting at a whopping $40,000 per bitcoin today. As a matter of fact, many cryptocurrencies have been thriving since the pandemic. Ethereum, another large cryptocurrency, has boasted YTD returns of 370%. Litecoin, another cryptocurrency, has a YTD return of 153%. While 2020 has certainly not been the year for traditional businesses, cryptocurrency has surged forward ahead of the market.
Regulations and Worries
Bitcoin is still far from being a perfect form of currency. Hacking attacks have resulted in millions of dollars worth of bitcoin being lost. In fact, every amount of bitcoin you own is susceptible to hackers, which is why some holders decide to store the currency in a USB to prevent theft. Despite that, the possibility of bitcoin addresses being hacked is a worrying notion to consider for holders.
While Bitcoin is known for its decentralized system of verification, that also means a lack of an authoritative bank to regulate business conducted using the cryptocurrency. Bitcoin whales are a large concern for investors, as the supply and price of bitcoins could swing based on their decisions. “Whales” is basically a term regarding bitcoin addresses that hold large amounts of the currency. Currently, there are around 1000 addresses holding 40% of all bitcoin. Without regulation, addresses that hold large amounts of bitcoin will continue growing, as the number of addresses that own 1000 bitcoin or more sits at 2334 right now, an all-time high. This makes holding the cryptocurrency even more dangerous, as collusion among whales could result in a market-wide shift in price.
But the US could see cryptocurrency regulations sooner rather than later. While Janet Yellen, US secretary of treasury, initially torpedoed cryptocurrencies as merely a vessel for terrorist and illegal activities, she clarified her stance later with a more positive outlook. Yellen has promised regulations regarding the potential downside of terrorism and illegal use of cryptocurrencies but still considering the upsides of improving the current financial system. Holders may soon be able to sleep easier knowing that regulations are coming soon.
Future Outlook for Bitcoin
And it certainly doesn’t stop there. The future is looking bright for crypto, as companies are slowly adapting to the new age of digital currency. In October, Paypal (NASDAQ: $PYPL) announced the fact that they will launch a new service allowing users to trade cryptocurrency on their platform. And in early 2021, users will be able to use these digital currencies as a form of payment. This is revolutionizing, as Paypal has approximately 300 million users all over the world. This means that millions of users will be able to use this new form of currency in the coming year to purchase anything that they previously used Paypal to pay with. This includes anywhere from shopping on Amazon to the local Walmart one block down your house. Other large companies, like Microsoft and AT&T, are implementing cryptocurrencies as part of their system as well. Digital currencies will see practical use in our day-to-day lives in the near future
All in all, it’s been a breakthrough year for cryptocurrency. Aside from initial drops of the currency during the beginning of the pandemic, the asset class has outperformed all other aspects of the market. It’s not too late to get in on the gains either, as many analysts are bullish about the future of cryptocurrency. Some analysts have even gone to say that Bitcoin may climb as high as six figures towards the end of 2021. There is also a possibility that world governments will decide to implement bitcoin as part of their financial systems, and this will surely improve investor confidence in digital currencies
Keep your eyes peeled for further news about large-cap companies adopting the use of Bitcoin and other cryptocurrencies in 2021, but be very wary of the current state of lacking regulation in cryptocurrency. Expect volatility as well as major pullbacks to the entire cryptocurrency market.