On January 3rd, which also marks the 12th birthday of Bitcoin’s Genesis block, the cryptocurrency hit a new all-time high of $34,789 according to CryptoCompare’s Bitcoin Price Index. The following day bitcoin corrected by 20% as the overheated market liquidated over-leveraged traders. This frenzy of trading activity set a record trading volume from top-tier exchanges (rated AA-C) of $68.3 billion on Jan 4th.
"Despite the 20% pullback due to bullish traders taking on over leveraged positions bitcoin fundamentals have never been stronger thanks to the overwhelming buying power of corporations adopting the currency as a hedge against inflation”
Bitcoin is currently trading above $31,000, a significant milestone considering bitcoin hit a low of sub-$4,000 at its nadir in March 2020. Similarly, Ethereum surpassed $1,150 to hit its highest level since January 2018 and is trading around $1,000.
The growing corporate adoption and chronic lack of supply is the driving force behind bitcoin’s parabolic advance. Ethereum is enjoying some of the institutional attention bitcoin has attracted and this is set to grow in 2021 as CME launches its much-anticipated ETH futures. The rise of decentralized finance has boosted demand for ethereum and the promising attempts to scale the congested network with the migration to ETH 2.0 are contributing to the bullish sentiment.
At a glance, here’s what’s driving BTC and ETH prices.
- Bitcoin as a hedge against inflation in a COVID-19 world
- Corporate support for Bitcoin is driving price
- Decentralized finance is still mostly based on the ETH network
- Ethereum 2.0 & Layer 2 promise to scale the network 1000x
Bitcoin as a hedge against inflation in a COVID-19 world
With the macroeconomic backdrop of unprecedented monetary expansion and negative real interest rates spurred on by COVID-19, it is no wonder that investors of all types are looking at hard assets such as Bitcoin as a gold alternative and a hedge against inflation.
Gold, which is Bitcoin's main competition as a store of value asset, has done OK this year, up by 19.72%, but performed much worse than Bitcoin which is up by 331% in the past 12 months.
Several high-profile central banks including the Reserve Bank of Australia and Bank of England have announced drastic Quantitative easing (QE) plans to combat the economic threat of COVID-19. Whilst these measures seem prudent, some investors are concerned this will lead to a significant rise in inflation. Typically, gold has been seen as the de facto hedge against rising inflation, but more and more Bitcoin is turned to as a hedge against inflation.
Bitcoin’s position as a gold competitor is set to increase as millennial investors - who strongly favour BTC over gold - will become a larger and more important component of the investor universe. Gold still has an approximately 25x market cap in comparison to Bitcoin and even a small crowding out of gold by Bitcoin as the alternative currency would lead to a Bitcoin price of over $100,000.
Corporate Investments in Bitcoin
The corporate support for Bitcoin from the likes of PayPal, Square and Microstrategy has caught the attention of institutional investors. In October, Square revealed it invested $50 million in Bitcoin and PayPal launched a new service letting its users in the U.S. buy, sell, and hold BTC, ETH, BCH, and LTC. The service is set to soon roll out to the rest of the world.
MicroStrategy has bought 70,470 coins, worth over $2.1 billion in 2020. Michael Saylor, MicroStrategy’s CEO, said at the time the move was driven in part “by a confluence of macro factors,” which included “unprecedented government financial stimulus measures including quantitative easing” and “global political and economic uncertainty.”
Several other firms followed suit. Life insurance giant MassMutual invested $100 million, and UK-based Ruffer Investment, which has $26 billion in assets under management, added exposure to BTC “equivalent to around 2.5% of the portfolio.”
Anthony Scaramucci’s SkyBridge Capital has invested $182 million, and Stone Ridge invested $115 million. These investments, coupled with Grayscale’s Bitcoin Fund (GBTC) increasing its bitcoin holdings by a staggering 158k bitcoins in Q4 are outstripping bitcoin supply leading to parabolic price increases.
Ethereum Scaling & Decentralised Finance Spurs Rally
Decentralized finance (DeFi) protocols have gained adoption in 2020 and this has increased demand for Ether. The cryptocurrency is used to pay for transactions on the Ethereum network, and these are necessary to interact with DeFi protocols. These protocols let users lend, borrow, trade and interact with a host of other financial service protocols offering almost anything from insurance to derivatives.
The launch of Ethereum 2.0’s staking contract which triggered the launch of the Beacon Chain, the first of four phases on the migration to Ethereum 2.0, has seemingly made a difference. Currently, 2.2 million ETH, worth over $2.1 billion, are locked in the contract, signalling the market's confidence in ETH 2.0 and its proposed 1000x increase in throughput.
Effectively, a significant percentage of Ethereum’s circulating supply has been locked by users who wish to become validators on the Ethereum 2.0 network and earn interest on their ETH for securing the network.
While ETH hasn’t established a store-of-value narrative like BTC, it’s safe to assume Wall Street investors are also eyeing the second-largest cryptocurrency, based on data from the increased AUM of Grayscale’s Ethereum Trust (ETHE), which hit $2 billion at the end of last year. Institutional interest is poised to grow in 2021 with CME set to launch ETH futures to accompany its popular BTC futures market.
Unlike Bitcoin, Ethereum is still trading below its all-time high of $1,422 set in December 2017. Investors are quickly honing in on this milestone and I expect it to reach fresh highs in a matter of weeks if not days.
Why this bull run is different from 2017
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In 2017, the bull run was driven almost entirely by retail investors and the initial coin offering (ICO) mania where projects raised tens of millions of dollars on a whitepaper with no product. By contrast, the 2020 bull run has seen around 10-20% of the search volume compared with the heights of the 2017 bull run according to Google Trends data.
- Not only are the buyers in this bull run different but so is the market structure. In 2017, the digital asset markets simply didn’t have the financial plumbing to support capital inflows from institutional investors. There was a dearth of regulated exchanges, custody solutions, crypto-native credit lines, and so on. In the last three years, there has been a tremendous amount of work on building better, more efficient markets. CryptoCompare for its part has built institutional-grade data feeds that are helping build digital asset index products suitable for institutional investors.
- Given the improved level of surveillance and regulation, market manipulation has become much less of a concern than in 2017. The prospect of more Bitcoin exchange-traded products seems likely in 2021, which would certainly boost institutional access to Bitcoin.
