Interest in Bitcoin and cryptocurrencies peaked in early 2018, then declined, and rose again in 2020 and early 2021. Will the crypto market for Bitcoin mature in 2021?
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The central theses
- A February disclosure by Tesla that it purchased $ 1.5 billion worth of Bitcoin pushed the digital currency to a record high of over $ 45,000
- The introduction of ether futures increased interest in cryptocurrencies
- Bitcoin is not yet a safe investment like gold
The first few weeks of Bitcoin in 2021 seem to have formed a microcosm of what is arguably the most visible trait of Bitcoin trading – volatility.
After a staggering surge last year, Bitcoin futures hit a record high of over $ 42,000 in early January. But in less than two weeks they had lost more than 20% of their value. However, by mid-February, the bulls were back on top, and Bitcoin set a new record of over $ 45,000.
This was the story for much of Bitcoin’s life. especially since Bitcoin futures (/ BTC) were introduced a few years ago.
Still, the world’s most valuable and recognizable cryptocurrency was at a much higher level than it was a year earlier as the growing interest of large Wall Street companies added to retail investment dollars.
The year started with a bang for institutional investors in Bitcoin, with notable news including:
- BlackRock (BLK), the world’s largest asset manager, has authorized two of its funds to invest in Bitcoin futures
- SkyBridge Capital hedge fund group started a bitcoin fund and invested $ 25 million of his own money
- Grayscale Investments, a digital asset manager offering cryptocurrency investment vehicles, hit a record of more than $ 700 million in a single day
- In February CME Group (CME) launched futures for ether (/ ETH) – the second most popular Cryptocurrency
- Also in February, the electric vehicle / battery giant Tesla (TSLA) announced in a release that it had purchased $ 1.5 billion worth of Bitcoin
Cryptocurrency Outlook for 2021
According to JB Mackenzie, Head of Futures and Forex Trading at TD Ameritrade, Interest in Bitcoin and other major cryptocurrencies is expected to continue through 2021 due to the launch of the CME Group’s Ether Futures. In a positive cycle, this futures product is the result of increasing interest in cryptocurrencies and should also further increase interest in the asset class.
Volatility is likely to persist in cryptocurrencies as well, as is the question of whether they are safe assets and alternative currencies, Mackenzie explained.
It is also likely that investors will continue to try to get an idea of what a reasonable valuation for Bitcoin might look like.
Some of last year’s price gains appear to have occurred as investors believed that cryptocurrency was an undervalued asset. As bitcoin – along with bitcoin cash, ether, and litecoin – gained momentum, the higher movement helped sustain more purchases.
The question now seems to be how much more extreme volatility Bitcoin investors will have to endure before a range develops that would indicate a certain level of maturity in the fledgling market.
Bitcoin vs. gold: is bitcoin the new gold? Not yet
The increasing popularity with big money as well as with retail investors makes it clear how important it is whether Bitcoin is a safe investment like gold.
The precious metal has historically maintained its value, cannot be printed like fiat currencies, and is less correlated to business cycles than stocks or risky assets like oil. Gold is also seen as a hedge against the US dollar and inflation and tends to rise as the value of money decreases.
Bitcoin was created as a digital currency that is not tied to any government. In theory, it has the potential to be a hedge against the volatility of traditional currencies as well as an asset that does not correlate with traditional risk-weighted assets like stocks. However, a quick look at Figure 1 shows that Bitcoin was significantly more volatile than gold.
FIGURE 1: Maybe one day, but not yet. Much has been said about the future of cryptocurrencies as an alternative to gold as a safe haven. Bitcoin futures (/ BTC – candlestick), however, were much more volatile than gold futures (/ GC – purple line). Data source: CME Group. Diagram source: TD Ameritrade’s thinkorswim® platform. For illustration only. Past performance does not guarantee future results.
Future of cryptocurrency
While it is possible that cryptocurrency will actually become a full-fledged safe-haven asset and currency hedge, Bitcoin maturation is not yet complete.
Because of its strong correlation with stocks, Bitcoin remains a risky asset for now. The question that remains, however, is whether it can ultimately become a “golden alternative,” said Mackenzie.
To do this, investors want to learn more about the history of Bitcoin performance to give perspective to the relatively young investment.
At the same time, Bitcoin could continue on its way to wider adoption as a currency hedge. “As Bitcoin continues to be used around the world, it will have the opportunity to gain a foothold as a currency hedge,” added Mackenzie.
Like the safe haven question, the currency hedging question doesn’t seem like it will have a definitive answer in the near future. The dollar and yen are likely to maintain their importance as world reserve currencies and safe haven facilities for the foreseeable future.
As the world’s payment systems become increasingly digitized, Bitcoin and other cryptocurrencies seem to continue to compete with traditional money. The TSLA filing in February seemed to nod to both Bitcoin arguments – the store of value as well as the payment intermediary. In its filing, TSLA said that the aim of buying Bitcoin is to “diversify and maximize the returns on our cash”. However, the company also plans to accept Bitcoin as a form of payment.
Bitcoin history has moved on since its inception. Now it will be interesting to see how investors think about cryptocurrencies in 2021.
Investment fundamentals: Bitcoin and blockchain