Bitcoin surged to a new 2020 high of $12,486, posting a 73% year-to-date return on investment.
Coinbase.com
As both crypto investors and traditional investors pay increasing attention to this alternative asset, a common question arises – what is driving bitcoin’s price?
Bitcoin has often been compared to a digital version of gold, as gold is an asset outside of the control of any government, regulated as a commodity and is used as a hedge and a store of value during times of geopolitical uncertainty.
The following are some of the factors driving Bitcoin’s price appreciation today.
Scarcity:
There are currently over 20 million bitcoin holders, while the market capitalization of the entire asset is only $226 billion USD. With a finite number of 21 million coins, only 0.27% of the world’s population could theoretically hold 1 Bitcoin. It is estimated that only 800,000 wallets hold more than 1 Bitcoin today.
Decreasing Power of the USD:
Since 1945, the world has treated the American Dollar as the de facto global reserve currency and that status is now being questioned. From rising competitors such as the Euro and the Digital Yuan, to decreasing reliance on the dollar by China and Russia, to Bitcoin acceptance increasing in emerging markets, the US Dollar’s position of power is no longer guaranteed. The US dollar continues to drop against both the Euro, GBP, Gold and Bitcoin over the last 30 days, particularly is the Federal Reserve continues to make capital infusions to prop up the American economy.
Superior Features:
Bitcoin holds superior features to other assets which include portability (easy to move anywhere and anytime), divisibility (easy to divide into smaller fractions known as satoshis), and acceptability (merchants around the world are beginning to accept bitcoin as payment). Bitcoin is the only asset that hedges against inflation can holds these features, whereas gold and other precious metals do not.
Self-sovereignty and security:
As geopolitical unrest continues in countries from Lebanon to the U.S., the value of holding your own wealth has become increasingly clear. Simply put, a government-backed bank is not as immutable to corruption as a cryptographic wallet.
Speculation:
I would be remiss to not mention that much of the price action in these early stages is still driven by speculators and bitcoin “whales”, i.e. holders of large amounts of bitcoin. Due to the network’s relatively modest market cap of $226 billion USD, price manipulation remains a concern.
Is bitcoin the right investment for you? As always, the answer depends on your personal financial goals. Do your own research.