Why is bitcoin going up?

Another week, another all-time high. Bitcoin’s price hit $24,000 for the first time in its history this Saturday, setting yet another new record high just a few days before Christmas. After this weekend’s price surge, bitcoin's year-to-date gains have increased to more than 225%. Social media platforms around the world are lighting up with bitcoin-related chatter as mainstream audiences join large institutions and renowned billionaire investors in paying close attention to bitcoin's sustained rally. Bitcoin is now fully in uncharted waters, with an entirely different set of factors fueling bitcoin’s rise.

1. Quantitative easing and fear of inflation

The amount of dollars in circulation has been steadily increasing since the gold standard was removed in 1971. Since the beginning of the Covid-19 pandemic, total money supply has increased from $4 trillion to $6.5 trillion as of December 1st, largely due to the stimulus bills. Just this week, Congress reached agreement on an additional stimulus bill for $900 billion, which means that very soon, about half of the world’s total supply of dollars will have been printed in 2020. Most economists agree that the increase in money supply has long-term consequences on the purchasing power of the dollar and can lead to far greater inflation rates. To hedge against this, many investors seek out what are known as “safe haven assets” like bitcoin — an asset with a finite and fixed supply.

As Michael Sonnenshein, Managing Director at Grayscale Investments summarized in a recent podcast:

“The amount of fiscal stimulus that has been injected into the system in the wake of the COVID pandemic to stimulate the economy and get things moving again, I think has really caused investors to think about what constitutes a store of value, what constitutes an inflation hedge and how they should protect their portfolios. It's important that investors think about that. And I think a lot of them are actually thinking about the juxtaposition between digital currencies, like Bitcoin, which have verifiable scarcity and thinking about that in the context of Fiat currencies, like the US dollar which seemingly are being printed unlimitedly.”

With further money printing on the horizon from stimulus packages and student loan forgiveness, the fear of inflation is likely to grow, making the case for store-of-value assets, like bitcoin, increasingly attractive.

2. Corporate treasuries adopt bitcoin

The store-of-value narrative has gained traction not just among retail investors, but with an increasing number of public and private institutions that have been replacing cash with bitcoin in their corporate treasuries. Companies like MicroStrategy, Square, and MassMutual have accumulated massive amounts of bitcoin in 2020.

MicroStrategy invested more than $475 million, Square invested $50 million (1% of the company’s total assets), and MassMutual invested $100 million into bitcoin. MicroStrategy and Square have already made more than 100% of their original investments in profit, with MicroStrategy bitcoin holdings now worth almost a billion dollars. Michael Saylor, MicroStrategy’s CEO, is now offering his advice to Elon Musk on converting Tesla’s balance sheet into bitcoin.

Yet another massive investment comes from hedge fund One River, that bought more than $600 million in crypto and teamed up with Alan Howard, Co-Founder of Brevan Howard Asset Management, to have more than $1 billion in BTC and ETH holdings by next year. This news followed pro-bitcoin statements from other hedge fund industry giants like Paul Tudor Jones and Stanley Druckenmiller, signaling that bitcoin’s “digital gold” narrative is increasingly starting to resonate with institutional investors, hedge funds, and ultra high-networth individuals.

3. PayPal and Square make it easier to buy and sell bitcoin

While crypto exchanges and trading platforms have continued to improve their user experience to attract the retail audience, mainstream financial tools with millions of users have also jumped into the mix in 2020. Not only does Square’s Cash App allow users to buy and sell bitcoin, but they now allow users to get bitcoin back on every transaction. Before the announcement, Cash App had only allowed clients to get U.S. currency back on transactions.

PayPal, another payments giant, announced in November that its customers in the US are now able to buy, hold, and sell bitcoin, in addition to other crypto assets, directly from within their PayPal accounts. It also confirmed that it plans to bring this feature to Venmo in 2021. On November 23, PayPal CEO Dan Schulman said in a CNBC interview, "Early next year, we're going to allow cryptocurrencies to be a funding source for any transaction happening on all 28 million of our merchants."

The arrival of fintech giants, like Square and PayPal, has played and will continue to play a huge role in driving consumer adoption of bitcoin in 2021 and beyond.

4. Bitcoin’s squeezing supply

The bitcoin halving in 2020 likely had a significant impact on bitcoin’s price. The halving is an event that happens every 4 years and cuts the reward that miners receive for adding new blocks to the bitcoin blockchain in half.

From May 2020, only half as much bitcoin was being minted, leading to a shortage in supply and eventual increase in price. Bitcoin has experienced a massive bull market after each halving. The first halving (November 2012) saw an increase from $12 to nearly $1,150 within a year. The second halving (July 2016) saw an increase from $650 to just under $20,000 in December 2017. Bitcoin’s third halving, which took place on May 11th, saw an increase from $8,570 to an all-time high of $24,000 this December.

The economics of the post-halving price appreciation are simple — if demand stays the same but the supply decreases, there is upward pressure on price. It is also likely that the supply is further squeezed by PayPal, Square, Grayscale, MicroStrategy, Grayscale, and other major companies buying up the vast majority of newly mined bitcoin, further underscoring bitcoin’s scarcity and fueling the price rally.

With bitcoin ripping through its all-time high and having better infrastructure and greater institutional and retail inflow than ever before, look for further climbs in 2021.

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