He's back! Whether you recognize it or not, the crypto currency market is hot again and it is led by the world's most popular and largest digital currency, Bitcoin.
After Bitcoin reached an all-time high of more than $20,000 per token in December 2017, the crypto currency lost more than 80% of its value over the next year. But since its low of just over $3,000 last December, Bitcoin has been virtually (and literally) unstoppable. Earlier this week, Bitcoin reached the $8,800 mark in daily trading, its highest level for just over a year, with the very important and psychological $10,000 mark once again within reach.
But for many, Bitcoin's rise is a mystery. After some research, six logical reasons can be found for the almost tripling of the value in the last six months.
1. the crypto currency is somehow "technical
One of the biggest arguments against investing in crypto currencies is that there are no basic metrics (at least the ones we are used to as equity investors) that will help investors determine an appropriate value for crypto tokens. With the exception of the underlying processing speed of the blockchain, there are no comparable metrics between tokens and blockchains.
This means that investors almost always rely on technical analysis - i.e. graphic patterns, resistance to the crypto currency and volume - to determine where digital currencies will go next. Relying heavily on technical analysis tends to lead to wild and momentum-based fluctuations in crypto currencies up and down, which is exactly what we are seeing at Bitcoin right now.
2. the premiums for mining will soon be reduced by half
A more tangible reason for Bitcoin's increase is the expected halving of mining premiums by May 2020.
Crypto mining describes the process by which individuals or companies validate transactions in a blockchain as correct and true. In Bitcoin's case, the transactions are validated using the proof-of-work model, where powerful computers solve complex equations to verify the transactions on the blockchain. As you might imagine, using these powerful computers can be expensive due to power costs and cooling requirements (computers can generate a lot of heat when fully operational). However, the block premium for people who are the first to solve a block (i.e. group) of transactions is 12.5 bit coins, which at Tuesday's rate of 8,700 US dollars per token is 108,750 US dollars.
But every few years the block premium is halved. The next expected halving should take place in May 2020, with the premium falling to 6.25 bit coins per solved block. Essentially, before this expected event, investors and miners are trying to push up the Bitcoin price, with miners trying to get as many block bonuses as possible before halving.
3. perceived scarcity
On the basis of the previous point, the perceived scarcity is probably responsible for part of the recent increase.
The world's largest crypto currency has 21 million tokens, of which more than 17.72 million are already in circulation, according to data from CoinMarketCap.com. This number grows as new blocks are solved and block bonuses are paid to the miners. Similar to how gold derives its value from the scarcity of existing physical metal, Bitcoin has further advanced the idea that the limited supply of tokens creates value. This imminent halving next May is another "proof" of this perceived scarcity.
4. increased institutional interest
The fourth reason why Bitcoin has a higher price can be attributed to the growing institutional interest from Wall Street and wealthy professional traders.
Basically, Bitcoin can only be acquired via unregulated crypto currency exchanges, which is almost always a taboo for institutional investors. The only exception is that Bitcoin futures contracts were introduced in December 2017 by CBOE Global Markets and the CME Group, which allowed institutions to bet on the future price of the popular digital tokens. While CME's number of Bitcoin futures contracts was typically between 3,000 and 4,000 contracts per day before Bitcoin started to rise again, this number doubled in the following weeks and months. Although it is unclear whether these bets are predominantly bullish, this suggests that interest in Bitcoin on Wall Street is increasing.
5. A forthcoming SEC decision on Bitcoin ETFs
The rally at Bitcoin could be caused by a pending decision of the SEC Commission (SEC) as to whether Bitcoin Exchange Traded Funds (ETFs) will be listed on the stock exchanges or not.
A decision by the SEC was actually expected months ago, but was postponed several times by the regulatory authority. In a document filed by the SEC a little over two weeks ago, the regulator announced that it would consider public comments for three weeks and the refutations for another two weeks. Due to the new deadline, the SEC is expected to decide on Bitcoin ETFs by August 19 or October 18 at the latest if the authority again postpones its decision.
If Bitcoin ETFs were allowed to list their shares on major US exchanges, this would likely result in capital inflows from both small and large investors. This could also be a kind of stabilising force in an otherwise very volatile area.
6. blockchain projects are progressing
The sixth and final reason for Bitcoin's great rally may be the promotion of blockchain projects within the financial sector as well as in other sectors and industries.
The blockchain is the transparent but unalterable digital ledger that underlies almost all crypto currencies in which transaction data is logged. Although Bitcoin's blockchain is designed exclusively to speed up the processing of financial transactions, it is still the foundation on which other projects have emerged. As more and more brand companies consider including the blockchain in their mix, the perceived validity of Bitcoin's "story" is gaining momentum.