At the time of the writing, the price of Bitcoin has been approaching to its all-time high. I’m certain that, when we, as a crypto community, look back in the following years, we will see the middle of 2020 as the “crossing the Rubicon” moment for Bitcoin as an asset class.
However, it is not caused by a single event. Instead, there is a lot of accumulation before mid-2020, and suddenly various events happened in a short timeframe that kickstarts the momentum.
What follows are the reasons I believe attribute to this sudden surge. And for ease of understanding, I divide the reasons into two groups – supply and demand. Without further ado, let us begin.
Demand Side
The arrival of a New Type of BTC Buyer (with Strong hands)
“Institution is coming” always has been a meme on crypto Twitter, maybe until mid-2020.
During the bull run in 2017, there are not many legit custodian services that can hold Bitcoin on behalf of big corporations. Now, not only the specialized custodial service providers such as Coinbase Custody can it, but also banks, thanks to the green light of the legislator.
Following Michael Saylor of MicroStrategy’s investment in BTC on August 11, 2020, there are more companies acquiring BTC as part of the assets in their treasury – the most one among them is Jack Dorsey’s Square, which has used 1% of the company’s assets, or 50 million USD, to buy BTC.
The main reason behind this phenomenon is that those companies believe the upcoming and future stimulus bills from the U.S. government will result in the devaluation of the USD. And since most of these companies hold USD denominated assets such as cash in their treasury, it is not that surprising that some of them convert part of their treasury to an asset that can combat the potential devaluation.
Besides buying a huge quantity of BTC at once, institutional investors tend to have a longer-term investment horizon than retail investors – as we can see Square classifies their BTC investment as ‘Other non-current assets’ on their whitepaper, which also includes the procedures that Square uses to acquire Bitcoin so that CFO in other companies can easily follow suit.
I believe that the higher Bitcoin’s market cap is, the more institutional investors will be interested in it, because 1) now the investment thesis of a fund can finally cover this asset, and 2) its average order size for an asset will not blow up the market. As Andrew Kang, one of the prominent personality on crypto Twitter, puts it:
New Generation Retail Traders with Deeper Knowledge
Comparing to 2017, retail traders and normies now become more finance-savvy due to the proliferation of fintech start-ups since then. And unfortunately, the recent pandemic has also made people around the world understand the importance of saving money and having investments.
Besides people having better financial literacy nowadays, it has never been easier to buy crypto – you can now acquire crypto through popular financial app such as Revolut, Cash App and Paypal (and soon Venmo), or even with credit cards through Simplex and Moonpay.
Once Bitcoin passes its all-time high, the media will cover the story, which obviously will attract more people who have not heard of Bitcoin before to buy Bitcoin – and there are a lot of them:
At the same time, I believe the all-time high news will make some of the investors who got rekt during the 2017 bull run consider coming back after they find out how the ecosystem has improved in the last 3 years, and the narrative change around it comparing to 3 years ago (“digital gold” vs “a get-rich-quick scheme”).
Supply Side
More BTC Locked on Ethereum Thanks to Yield Farming
If you’re not a no-coiner or lived under a rock during the summer of 2020, you probably have heard the term “yield farming”.
For those who don’t know, “yield farming” is a tactic used by the new DeFi protocols to distribute their tokens, usually by asking users to deposit their assets into the protocol; in return, the depositors get the tokens issued by the protocol on a pro rate basis.
Not surprisingly, wBTC, the wrapped version of BTC from BitGo, is one of the assets that can be used to ‘farm’ various kinds of protocol tokens. Thanks to this, despite the DeFi mania in the past summer, has gradually died down, now there are increasing more wBTC circulating on the Ethereum blockchain, as the graph below from Defi Pulse shows:
The reason why this contributes to the price movement of BTC is, as more BTC circulates on the Ethereum blockchain, the less supply there is on the market since the wrapped version of the BTC now has more utilities than just a pure store of value – now you use your wBTC as the collateral to borrow other assets on Aave, or you can provide liquidity on Uniswap and earn transaction. And we’re just early days as there is only below 0.7% of existing BTC on the Ethereum blockchain – imagining the price impact it would have if there are more than 10% of BTC on it.
Halving in May 2020 + Increasing More Lost of Funds
Finally, we are now more likely to see a supply shock on the market after the halving in May 2020.
In case you do not know what is halving – Bitcoin blockchain programmatically reduces its block rewards for miners by half roughly once per four years. After the recent halving in May 2020, now the block reward for miner is 6.25 BTC per block.
On top of that, as time goes by, there will be more Bitcoin ‘lost’ due to losing access to private keys – one analyst even estimates there are 1,500 Bitcoin lost every day.
Conclusion
As the price of Bitcoin inches closer to its all-time high, more people will have a concern whether it will suddenly drop to 4,000 USD as it did in 2017. I believe we will not see the same thing happen because of the reasons above. As matter of fact, I doubt we will ever see Bitcoin’s price below 10K again.
If you’re still not convinced, think about the potential upside – what if, a big if, the “Bitcoin’s digital gold” narrative turns out to be true in the following years, Bitcoin’s market capitalization could potentially reach as high as that of gold, which translates to up to 40 times ROI opportunity – I don’t know about you, but it sounds a lot like an asymmetric bet that I wouldn’t want to miss out.
