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SPEED TAKE: Bitcoin at new high; what is driving it?

Updated : January 07, 2021 09:57 PM IST

Bitcoin is at a new high of $38,000, with a market above $1 trillion.

Bitcoin’s future does look much more promising than it did till some months back

As recently as September 2020, Bitcoin’s critics were readying obituaries for the cryptocurrency when it came perilously close to slipping below $10,000 apiece.

Four months on, Bitcoin is at a new high of $38,000, with a market above $1 trillion.

So what explains this dramatic turnaround in fortunes?

A big factor is clearly the torrent of global liquidity that is now seeking out this esoteric currency, in the process according it a place alongside other conventional asset classes.

Over the past year, many deep-pocketed institutional investors and hedge funds have warmed up to Bitcoin and other cryptocurrencies. In October, PayPal entered the cryptocurrency market allowing its users to buy and sell cryptocurrencies using their accounts. In November, billionaire US investor Stanley Druckenmiller told CNBC that he owned bitcoins and in December BlackRock’s CEO Larry Fink said that bitcoin can possibly “evolve” into a global market asset.

Some of the most high profile Bitcoin critics in the world of finance too appear to have become faithfuls. JP Morgan boss Jamie Dimon who in 2017 had described the cryptocurrency as a fraud, recently said that “blockchain itself will be critical to letting people move money around the world cheaper.” Economist Nouriel Roubini, after earlier having predicted that bitcoin was headed to zero, said in November that “bitcoin is maybe a partial store of value.”

All this has led to a greater acceptance of the cryptocurrency among retail investors, further fuelling its rise.

Industry experts say that devaluation of fiat currencies because of massive money printing by central banks in the wake of the pandemic could be another factor driving investors to alternative assets like cryptocurrencies.

What next

One of the biggest criticisms about Bitcoin, or any cryptocurrency for the matter, is its inherently volatile nature. Bitcoins designers—and supporters—argue that volatility is the price for keeping it free from distortions by governments and regulators. Whether panic or euphoria in the market for Bitcoins, there will be no intervention by the state.

Bitcoin’s future does look much more promising than it did till some months back. But investors would do well to keep in mind that wide acceptance does not make Bitcoin immune to the kind of stomach-churning volatility seen in the past. Besides, as veteran investors in any asset class will know, too many disbelievers turning faithfuls more often than indicates a short term peak.

SPEED TAKE: Bitcoin at new high; what is driving it?

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