Anyone who is keen to grab a slice of the Bitcoin pie is aware of how volatile it is. This digital currency has undergone many peaks and crashes in the last decade. The Bitcoin crash in June, 2021 when prices fell below $30,000 may have given investors a jolt, but prices have been on the rise again. Only in a matter of few days following this crash Bitcoin began to climb steadily to $35,000. Experts are of the view that prices will continue to escalate. The reason behind the crash was possibly China’s crackdown on crypto mining activities and ordering a shutdown of crypto trading in its major banks. Even if the market dips during weekends, it bounces back during the week.
Reasons Why Bitcoin Prices have been going up:
- There is a common belief amongst investors that no matter how far the prices fall with a crash, they will recover. This has happened in the past and made investors bullish. They are confident that Bitcoins can retest the price point and push past it. This could be one of the reasons why Bitcoin prices have been rising.
- The increasing inflation of the USD has a lot to do with Bitcoin prices escalating. Inflation is usually 2% annually but with the Covid outbreak, governments have been extending financial stimulus packages to salvage the collapsing economy. This reduced the purchasing power of the dollar and got investors worried. To hedge against the growing inflation, investors have taken a step back from fiat currencies and opted for safe haven assets like the Bitcoin.
- With more and more businesses leaning towards accepting crypto payments, it has given Bitcoin prices a big boost. PayPal recently announced its intention to let its merchants and users buy, hold, and sell Bitcoins. PayPal owns Venmo, a payment app, catering to more than 40 million users. This would automatically make Bitcoins more accessible and popular than other payment methods. Even Cash App and Square have started to accept cryptos as payment.
- The recent Bitcoin halving episode is likely to drive prices higher. There can only be 21 million Bitcoins and this will not change. This makes the crypto scarce. In comparison, other scarce assets can be synthetically manufactured. Moreover, with halving, Bitcoin rewards are cut by half every 4 years. The latest halving happened in May, 2020, reducing its rate of inflation. Till now, Bitcoin prices have closely followed its stock-to-flow ratio; if this goes on, values will be close to $100,000 by 2021-end.
- With Bitcoin as a popular safe haven asset, publicly traded businesses are trying to convert their funds into Bitcoin because it is a far secure and sound store-of-value. A business analytics firm, Micro Strategy, converted about $425 million cash into Bitcoins. Others have started doing the same as these companies are confident that Bitcoins are safer as store-of-value.
- Finally, as mining network continues to grow, mining difficulty also becomes higher. Mining is an energy-intensive process which miners must bear. Since Bitcoin protocol ensures that only one block can be mined in 10 minutes, more hash power does not mean an increase in coin supply. It only means increase in mining difficulty. Scarcity causes prices to rise making this another possible reason for Bitcoin’s price increase.