Putting Bitcoin’s Record-Breaking Rally in Context

Bitcoin’s price crossed US$19,892 last Monday, breaking its previous record of $19,782.21, which it hit in December 2017. Here’s why this price rally is different.

The price of Bitcoin (BTC) climbed to a record high on November 30, reaching over US$19,892 on various exchanges. The actual figure varies between news reports, depending on the exchange they are referring to. But no matter what BTC’s actual peak point was last Monday, this cryptocurrency – with a market cap of $358.43 billion – has surged as much as 170% since the beginning of this year, Bloomberg data shows.

Before the current peak, the highest BTC price on record came on December 17, 2017 when it rose to $19,783.21 as per the CoinDesk Bitcoin Price Index. It was then that Bitcoin gained widespread media attention and entered the mainstream.

While most news reports have claimed the recent spike to be a new all-time high, there are several factors to consider. According to a report by CoinTelegraph for instance, BTC’s price on November 30 did not break the December 2017 record price at Coinbase.

The peak Bitcoin price record on Coinbase was $19,891 in December 2017. But on the exchange, BTC price on November 30 only reached $19,873 on Coinbase, thereby failing to break its previous record.

This is because BTC prices vary between exchanges. We break down the reasons behind this difference for you.

Why Bitcoin prices vary between exchanges

There are several factors that cause BTC prices to differ from exchange to exchange.

1. Liquidity: Since BTC is a decentralized digital currency, it does not have a standard price—nobody knows what BTC is supposed to cost. Therefore, the price of BTC is determined by the law of supply and demand. When the demand for BTC goes up while supply contracts, BTC prices increase, and vice versa.

Bigger cryptocurrency exchanges like Binance and Coinbase have a higher trading volume compared to smaller exchanges. Therefore, the difference in supply between these exchanges impacts Bitcoin’s trading price.

2. Average estimate pricing: You may Google the price of BTC to track its progress. But, Google, or any other price tracker for that matter, does not offer accurate information. This is because most price trackers calculate an average estimate or a recently traded price of BTC on a prominent exchange.

For example, Google’s BTC price estimate is based on the Coinbase API, which is why it displays BTC price in U.S. dollars.

3. Inefficiencies in trading across exchanges: Moving money or trading across exchanges is difficult because it requires large collateral to execute effectively. Therefore, it makes it difficult for traders to arbitrage the price difference across exchanges.

This in turn, allows the price differences between exchanges to persist longer than they would in an efficient market. Moreover, infrastructural limitations also make it difficult to buy BTC across various exchanges quickly, adding to the arbitrage problem.

Finally, although a minor factor, trading fees on different exchanges can also impact the final trading price of Bitcoin.

So, now that you understand why BTC prices differ between exchanges, let’s focus on its recent spike and how it is different this time.

Why the recent spike in Bitcoin price is different this time

Bitcoin has gained significantly more attention over the last few years compared to its humble beginnings. Bitcoin’s price have always been on a roller coaster ride – sometimes surging past records with ease, and at other times falling far below people’s expectations. But most analysts and industry experts claim that the recent rally is different.

Institutional Interest:

J.P. Morgan, the largest bank in the U.S., has long been critical of Bitcoin. J.P. Morgan CEO Jamie Dimon called bitcoin a “fraud” in September 2017.

CNBC had quoted him saying, “It’s just not a real thing, eventually it will be closed.” Less than six months later, he backpedaled and said he regretted making the comment. The banking leader’s views have softened considerably since then. J.P. Morgan onboarded its first cryptocurrency exchange clients Coinbase and Gemini earlier this year.

During the 2017 rally, I had so many contacts reach out asking how they can buy Bitcoin that I had a template that I would simply copy and paste. This time around, very few reached out.

Moreover, the banking giant’s analysts claimed in October this year that the BTC price could potentially double or triple if current trends continue. Earlier the same month, fintech giant Square invested $50 million to buy 4,709 Bitcoins, which made up 1% of the company’s assets post purchase.

Moreover, U.S. billionaire investor Stanley Druckenmiller announced early last month that he owns Bitcoins. Although his gold position is many times higher than Bitcoin, he predicts that his Bitcoins will outperform gold.

Henri Arslanian Bitcoin Price
Henri Arslanian, PwC Global Crypto Leader. Photo courtesy of Henri Arslanian.

PwC Global Crypto Leader Henri Arslanian told Jumpstart, “Whilst the 2017 rally was driven by retail investors, this rally seems to be mainly driven by institutional investors.”

“During the 2017 rally, I had so many contacts reach out asking how they can buy Bitcoin that I had a template that I would simply copy and paste. This time around, very few reached out,” he added.

Commenting on how the recent Bitcoin rally is different than the 2017 one, he further said that institutional investors now have a multitude of regulated cryptocurrency exchanges and instruments at hand – most of which did not exist in 2017.

“The multitude of regulated crypto exchanges and custodians have eliminated the ‘career risk’ for institutional investors,” he said. “And that matters as many people working for an institutional investor would not want to risk their job for an investment that could get them fired, especially in this environment.”

(In another ironic example, while calling Bitcoin a “fraud” in 2017, Dimon had said that he would “fire in a second” any J.P. Morgan trader who traded in Bitcoin, referring to them as “stupid.”)

Besides, there are macro factors “encouraging institutional investors to explore crypto,” says Arslanian. These include the record levels of quantitative easing during the pandemic, to “well-known fund managers deploying capital in this space.”

Moreover, Arslanian predicts an impending change in institutional investors’ attitude towards cryptocurrencies.

“I suspect the question investors will ask fund managers will gradually switch from, ‘Why did you invest in crypto,’ to ‘Why have you not yet invested in crypto.’ But how quickly that will happen is the question,” he says.

He adds that since the 2017 rally was driven by retail investors’ fear of missing out, it remains to be seen whether institutional investors will feel the same this time.

“The question is whether we will see institutional FOMO in 2021,” he says.

Hedge fund managers are looking at long-term investment

Famous billionaire hedge fund manager Paul Tudor Jones told CNBC in an October interview that he believes the Bitcoin rally is in its first inning, and has become more bullish on the cryptocurrency.

“I like bitcoin even more now than I did then. I think we are in the first inning of bitcoin and it’s got a long way to go,” Jones told CNBC.

Investors are buying Bitcoin at record-breaking prices with a view to hedging against record-breaking quantitative easing.

Jones’ reasoning is driven by the fact that governments around the world are printing money to help finance their COVID-19-related emergency stimulus packages. The U.S. printed $3 trillion in June this year in efforts to revive the economy from the pandemic-induced financial crisis. And as governments continue their efforts to stimulate economies, inflation is expected to increase.

Therefore, investors are calling Bitcoin an inflation-hedge instrument, comparative to gold. In fact, in October, Jones called Bitcoin the best inflation hedge.

In a letter to clients entitled ‘The Great Monetary Inflation,’ Jones explained his reasons behind authorizing the investment in Bitcoin. He suggested in the letter that he was expecting Bitcoin to be a winning bet, and added that there may be a “growing role for Bitcoin” in hedging against inflation.

Consequently, this suggests that investors are buying Bitcoin at record-breaking prices with a view to hedging against record-breaking quantitative easing.

The PayPal effect

On October 21, PayPal announced that it would allow eligible U.S. account holders to buy, hold, and sell cryptocurrencies directly from their PayPal account. The company has also pledged to make cryptocurrencies available “as a funding source for purchases at its 26 million merchants worldwide.”

The cryptocurrencies currently available through PayPal include Bitcoin, Ethereum, Bitcoin Cash and Litecoin. The announcement generated significant interest since these proposed features may help to propel Bitcoin into the mainstream.

Analyst optimism

The research arm of investment manager AllianceBernstein, which had ruled out Bitcoin as an investment asset back in 2018, changed its mind. According to a report by CoinDesk, Inigo Fraser-Jenkins, Co-head of the portfolio strategy team at Bernstein Research, now accedes that the cryptocurrency does have a role in asset allocation.

According to Bloomberg analysts, Bitcoin’s price could reach $50,000 in 2021 and hit a market cap of $1 trillion. According to their report, their prediction is based on the unparalleled quantitative easing, the resulting increase in debt-to-GDP ratio, the interest of institutional investors, increasing adoption, and the decreasing supply.

What to expect in the near future

Most analysts believe that the current Bitcoin rally will last longer than the 2017 one due to the investor focus on the scene, according to a report by Coindesk. But in the short-term, not all data points towards a bullish near future.

According to data provider CryptoQuant, Bitcoin’s inflow to exchanges has exceeded outflows since the Thanksgiving sell-off. Therefore, in the short-term, price correction is to be expected, which could send BTC price back to around $16,000, according to CryptoQuant CEO Ki Yong Ju.

Whichever direction Bitcoin moves in, it can be easily concluded that the present Bitcoin price rally is significantly different from the previous one. While 2017 price rally was driven by an increase in active retail investors, this one is being driven by increasing investment from institutional investors with a long-term view.

In other words, this rally is more sustainable than the previous one, and $20,000 Bitcoins could be here to stay.

Header image by Dmitry Demidko on Unsplash.

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