On August 23 Bitcoin (CRYPTO: BTC) briefly exceeded the $ 50,000 mark for the first time since May. Although Bitcoin is still over 20% below its all-time high, Bitcoin has rebounded more than 50% from its recent low in July. ether (CRYPTO: ETH), the second largest cryptocurrency by market capitalization, has done even better, increasing by around 90% over the same period. This trade shows how much Bitcoin and Ethereum remain extremely volatile and there is no telling what they will do in the short term.
However, zoom out over a period of a few years and Bitcoin’s success and growth path will become clearer. Here are three simple reasons why Bitcoin has more wiggle room.
1. Institutional acceptance
The catalyst that has driven Bitcoin’s shift from unconventional markets to mainstream is institutional adoption – which is just a fancy way of saying big corporations are stepping into the cryptocurrency space. Their commitment is to accept Bitcoin as a means of payment, hold Bitcoin as an asset, trade Bitcoin, develop financial products related to Bitcoin, and much more. Demand is increasing as more and more companies are interested in this area.
As a result, the cryptocurrency market has changed a lot in recent years. Today it is dominated by bigger players. Leading US cryptocurrency exchange in July Coinbase Global (NASDAQ: COIN) published its institutional report for the first half of 2021. The report found that “an increasing proportion of our clients are now viewing BTC as a mainstay in their long-term portfolios and an emerging wealth store that competes with gold. […] BTC deposited $ 657 billion in assets globally at the end of the first half as institutional investors such as traditional hedge funds, foundations and corporations increased their exposure over the period. ”
Order volumes support this statement. Coinbase’s institutional trading volume accounted for 68.6% of the total volume for the second quarter, compared to just 64.1% in the previous quarter and 60.7% in the same period last year. Coinbase also found that Ethereum and other cryptocurrency investments account for a larger portion of the total trading volume. In the second quarter, Coinbase saw higher Ethereum trading volume than Bitcoin for the first time in its history, as decentralized finance and non-fungible tokens gain popularity. In summary, it can be said that a lot of money is pouring into the cryptocurrency.
2. More financial products and improved accessibility
User-friendly apps, sophisticated reporting, and detailed tax accounting make it easier for people like you and me to buy cryptocurrencies. Depending on the track record and the security of the exchange, investors can now earn substantial interest on Bitcoin, Ethereum, alternative coins, and stablecoins.
Much like a bank, exchanges like Coinbase pay retail investors an interest rate that is lower than what the company believes it can get by lending that asset. Given the demand for large-scale trading, this interest rate is comparatively higher than your typical US savings account. It’s a win-win situation as the stock market lends your asset as collateral in exchange for a market leading and relatively safe rate of interest.
Much like stocks, cryptocurrency investments have different risk profiles that can suit a particular investor’s preferences – adding another level of sophistication to the room. Speculative investors can now buy alternative coins such as Polygon, Cardano, or Chain link from a variety of exchanges, many of which pay interest.
3. Better investor protection
In essence, the regulation should offer market participants basic protection and at the same time create a fair marketplace. There is a lot of talk about the dangers of regulation, especially the intervention of the SEC and oversight of cryptocurrency exchanges. It is clear, however, that the leaders of some of the largest cryptocurrency companies actually support regulation.
“I think we’ve always welcomed sensible regulation in this area,” said Brian Armstrong, Coinbase CEO, during the company’s second quarter conference call. “Basically, we just want to be treated on an equal footing with all other traditional financial services companies.”
BlockFi CEO Zac Prince said the following in a blog post on July 28th:
We have had ongoing discussions with regulators since Flori and I started BlockFi because cryptocurrency is a new area for many and we knew there would be questions. We have said time and again that the key to our industry’s success is proper regulation. Ultimately, we see this as an opportunity for BlockFi to define the regulatory environment for our ecosystem.
Regulation has the potential to give legitimacy to the cryptocurrency market. As we’ve seen with institutional adoption and the emergence of new financial products, Bitcoin, which is gaining traction in various industries, is usually a good thing for this market.
The stigma surrounding Bitcoin and other cryptocurrency investments usually stems from the idea that they are difficult to understand or that the market is opaque. Despite all the progress that has been discussed, this stigma remains a barrier to entry for many investors.
Regulation can in some ways complicate the cryptocurrency market and make it less profitable for some actors, but it could also create a layer of trust for retail investors and institutions. Transparency, whether through regulation, easier-to-use financial products, or better tax documentation, is critical to the future of Bitcoin as a financial asset. Bitcoin’s price can reach whatever it wants in the short term. But in the long run, Bitcoin’s rich potential is easy to see as the market matures.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.