Sunday 3rd of January marked Bitcoin’s 12th birthday and oh has it grown this past year.
In fact, Bitcoin has reached an all-time high of above $34,000 on its birthday after having passed its previous all-time high ($20,000 during its 2017 boom) just a couple of weeks before. What seems to fuel this price surge is increased demand from institutional investors. These are companies or organisations that invest money on behalf of other people (think large investment managers like BlackRock).
In previous years those institutions steered clear of cryptos because of their risky nature. But now and throughout this economic crisis they seem to be gaining confidence in cryptocurrencies. Some have resorted to Bitcoin to hedge against inflation (that is from the range of government measures that have pumped more and more money into the economy).
Additionally, institutional investors like other companies are businesses that need to survive. Having entered a long economic crisis it makes sense that they would look for alternative assets like Bitcoin, assets that potentially offer high returns for their clients.
During Bitcoin’s previous boom in 2017, it climbed from $1,000 to almost $20,000 and then dropped down below $4,000 in 2018. Cryptocurrency supporters claim that this year’s boom is unlike 2017 pointing to institutional buyers who have played a part in driving demand this time around.
However, just because some institutional investors are backing Bitcoin now it doesn’t necessarily mean that the price boom is sustainable. We’ve been shown time and again in history that institutional investors can get it wrong and can play a huge part in contributing to speculation.
In my view, financial crises seem to deflate the public’s confidence in traditional financial systems. We’ve seen that in 2008 and again throughout 2020. Lack of consumer confidence in traditional financial systems makes the market ripe for fintechs (including cryptocurrencies) to take the lead and confirm their relevance. Bitcoin’s boom at this time may be an example of yet another stage of the gradual loss of faith in traditional financial systems.