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Hold or Sell: How High Can Bitcoin Go in 2021?

DailyForex |Artem Gramma | Dec 2020

global supply of negative bond yields - Hold or Sell:  How High Can Bitcoin Go in 2021?

After a multi-year bear market, Bitcoin was again trading near its all-time high by December 2020

From the halving cycle to global monetary stimulus in response to Covid-19, many factors have contributed to the rally. This article outlines the fundamental bullish case for Bitcoin and highlights some Bitcoin price predictions for 2021 from the experts. My personal view is that 2020 had more similarities with 2016 than 2017. I expect 2021 to mark a new breakout for Bitcoin, with the price reaching new all-time high at $50,000, following historical patterns, albeit in a more muted fashion.

The Fundamental Bullish Case

Why is Bitcoin going up? There are many reasons to be optimistic about Bitcoin now. We could talk about its network effects or censorship resistance characteristics. We can also explore the narrative that millennials exceedingly prefer to own Bitcoin relative to other assets, including gold. As millennials and Gen Z inherit nearly $78 trillion of wealth, some of it will inevitably flow into Bitcoin. However, in 2020 and looking into 2021, the digital gold story, institutional adoption and supply-demand dynamics will be the main drivers of the Bitcoin price.

See:  What the MicroStrategy Deal — and Others Like It — Means for the Future of Bitcoin and Altcoin Prices

Bitcoin as Digital Gold 

Gold has been used as a reliable store of value for centuries. Its main attraction is its scarcity as limited supply exists, and gold mining is an expensive and slow process. This puts gold in stark contrast to fiat currencies, that can be printed at will by central banks around the world.

Like gold, Bitcoin is a scarce asset. Only 21 million coins will ever be created, and close to 90% have already been mined. The current inflation of the Bitcoin network is 1.8% and will decline over time as block rewards decline further. This process is known as halving and refers to the gradual reduction of block rewards by 50% approximately every four years. As a quick reminder, block rewards are the only way new Bitcoins can be created.  Scarcity aside, Bitcoin is more portable and divisible than gold, making it a better store of wealth in the eyes of some investors. Recent comments by Deutsche BankStan Druckenmiller and Rick Rieder suggest as much. And while gold has an estimated market cap of around $9 trillion, Bitcoin is currently valued at under $350 billion.

Institutional Adoption 

There is sufficient evidence of increasing institutional interest in Bitcoin. It is driven, in part, by fears that current expansionary monetary policy pursued by central banks around the world will eventually lead to inflation. Federal Reserve, for example, has printed around 20% of all US dollars in circulation just this year. Over the next several years, accelerating institutional inflows could have a meaningful impact on the Bitcoin price potential, considering the relatively small size of the market.

See:  Steve Wozniak’s Blockchain Venture Lists Cryptocurrency Token, Reaches $950M In 13 Minutes

In 2020, Bitcoin is increasingly being used to hedge against inflation and macroeconomic risks, including by prominent Wall Street investors. Paul Tudor Jones and Bill Miller, among others, have disclosed their positions in Bitcoin and reiterated a bullish view on the asset.

The rapid growth of the Grayscale Bitcoin Trust, the first publicly quoted trust for bitcoin, is another indicator of growing institutional participation. Around 80% of Grayscale investors are institutions making it a reliable barometer of institutional sentiment. The latest update from Grayscale on December 8th, shows total asset under management (AUM) of $12.6 billion, up from around $1.2 billion at the end of 2019. AUM for the Grayscale Bitcoin Trust was at $10.4 billion up from circa $0.8 billion at the end of 2019.

Grayscale and bitcoin - Hold or Sell:  How High Can Bitcoin Go in 2021?

Another interesting development seen in 2020 was the push by some corporate treasuries to allocate a portion of their cash balances to Bitcoin. MicroStrategy's $425 million investment and Square's $50 million position are two notable examples. Earlier this month, MicroStrategy announced plans to offer $400 million of convertible bonds with net proceeds used to double down on its Bitcoin investment.

See:  Someone Just Sent $1 Billion in Bitcoin, Paid Only $3 in Fees

Due to the overwhelming demand, the bond offering was upsized to $550 million. According to the latest data, company treasuries now own around 4.2% of the total outstanding supply of Bitcoin.

Why are they investing in Bitcoin? From the corporate treasury perspective, there are few other options. Global supply of bonds with negative yields is at an all-time high, and traditional fiat currencies tend to lose their purchasing power over time due to inflation. Under these conditions, holding an excessive amount of cash on the balance sheet might be detrimental to shareholder value.

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