May 11, 2020. Bitcoin investors have been waiting for this moment for nearly four years. This date is the automatic trigger for a major event for the currency and its blockchain: Halving Day. This event generates, among other things, a decrease in the number of bitcoins in circulation.
Cryptocurrency, like any asset subject to the law of supply and demand, is becoming more scarce (halving the rate of new bitcoin creation). What is rare becomes expensive. Investors, eager to see the value of their asset increase and bewitched by the rising price, want to take advantage of this event to strengthen their position in this “digital gold.”
This belief, regarding the “strength” of this monetary unit as a financial asset, is understandable.
At a time when nations are racing against time to vaccinate as many people as possible and have been multiplying measures for nearly a year to limit the health and economic impact of the COVID-19 pandemic, Bitcoin, on the other hand, is soaring.
The year 2020 has been a fruitful one for the cryptocurrency.
With u200% increaseThe return is far from the 0.5% of the Livret A.
At the beginning of the year, the momentum remains: +66% over January and February.
Currently, the price of bitcoin varies between 55,000 to $60,000.
Anyway, you get the idea! The value of the cryptocurrency is moving strongly. On the upside, it’s all good… for now.
But this Bull Run Will it continue? Will the current speculative bubble burst, causing Bitcoin to fall violently?
Find out in this article the behind-the-scenes of this rise and why you should properly assess the risks associated with this type of investment.
But a Bull Run Bitcoin, what exactly is it?
Bulls – a race – a cryptocurrency.
Hard to connect those 3 words. Don’t panic! We’ll explain it all to you.
This is a picture. A bull when he charges and attacks a matador, he tries to gore him with up and down head movements.
Bitcoin’s price movement follows a similar pattern. A progression marked by meteoric rises as observed over the following periods:
- +1,800% over the year 2017;
- A 2-fold increase in price over the first 6 months of 2019.
In short, a Bull Run is simply the increase of a price over a long cycle. For Bitcoin, this increase occurs in fits and starts.
As we have seen, the year 2020 was marked by this “type of growth.”
Since its inception, the fluctuations of the cryptocurrency have been associated with a fad as it is so difficult to identify a correlation between its price, which is beyond the control of states, and its intrinsic value.
This rise is the result of halving daybut not only …
Central banks, institutional investors and large corporations have been and are still actively involved in the rise of Bitcoin, at this Bull Run.
Bitcoin halvings in a nutshell
One of the main interests of Bitcoin and the blockchain is its transparency.
All players in this market are aware of all transactions made with this currency.
Mining provides this transparency. Computers, the miners, are responsible for verifying the authenticity of each transaction. This verification involves solving an increasingly complex puzzle.
Although automatic, this operation is paid for. This is why we see a real competition between computers to “win the bet”. The winner is paid in bitcoins of course.
This payout is divided by 2 at each halving.
In the very early days of cryptocurrency, miners were paid 50 bitcoins. In 2016, they were paid 12.5 bitcoins.
Central bank support… For Bitcoin
U.S. Federal Reserve (FED), European Central Bank (ECB), … The current pandemic has forced various central banks to step in to economically support the states and create the conditions for recovery as quickly as possible.
This intervention consists of a massive injection of liquidity.
What’s the principle?
Central banks are first-tier banks (as opposed to commercial banks, which are second-tier) and are the only ones empowered to create fiat money and control the amount of it in circulation in the economy.
To limit the impact of the pandemic, they simply created money and offered help in the form of loans to different economic agents (states, treasuries, banks, …).
These loans are indirect. Central banks will lend this liquidity by buying back securities (corporate bonds, sovereign bonds, stocks) held by these investors in the secondary market (the buying and selling of “used” financial securities).
Rich with this new liquidity, economic agents then support their national economy by buying public debt or corporate securities (shares, corporate bonds).
These interventions play a fundamental role in the rise of certain assets and especially Bitcoin.
Falling bond yields benefit risky assets
The money injected by central banks weighs on the primary (newly created securities that can only be bought through a bank) and secondary markets.
Let’s take the European situation as an example.
In March 2020, the ECB proposed a program to support businesses of 750 billion euros.
With such a sum, the ECB becomes a major buyer.
- the demand for bonds grows violently;
- the number of securities available for purchase falls sharply.
Result: bond prices rise, bond yields fall.
Economic agents, who can no longer buy securities on the secondary market, decide to buy sovereign debt on the primary market.
Mechanically, the demand for government bonds increases and is accompanied by a drop in bond interest rates.
Falling bond yields encourage investors to buy more remunerative assets (stocks, cryptocurrencies, …) to grow their liquidity.
Finally, the prices of these riskier assets rise significantly.
That’s what we’ve been seeing, for almost a year, on Bitcoin.
Fear of inflation also benefits Bitcoin
Central bank intervention has had a second effect on the Bitcoin price.
With their accommodating monetary policy, central banks want a measured increase in inflation.
This inflation is seen as a risk of loss of purchasing power by investors.
The crypto-asset then appears as a “safe haven”, an interesting option to preserve the value of their capital.
As the demand for bitcoin grows, so too does the demand fora rise in the cryptocurrency’s price.
Economic agents are promoting this Bull Run
Institutional investors (JP Morgan, BlackRock …), large companies (Tesla, PayPal, …) and media personalities (Nabilla, …) are increasingly interested in crypto-currencies and ensure “the promotion”.
There is no shortage of these high-profile interests to capture the attention of individuals. À The mistrust of the beginning is replaced by an increasingly popular infatuation.
Virtual currencies are the hot investment.
On October 21, financial intermediary Paypal announced the launch of a dedicated cryptocurrency service in 2021. Account users will be able to pay with bitcoins, as well as buy and sell them.
Accessing cryptocurrency is getting simpler and more democratic. This announcement was part of the Bull Run in late 2020.
Trees don’t climb to the sky: beware of Bitcoin’s fall
May 11, 2020 halving day, central bank intervention, institutional player involvement played a non-negligible role in the recent rise in the price of virtual currency.
There is a craze, a real “hype” around Bitcoin. That’s for sure.
Many see it as a safe haven, THE opportunity to grow their money quickly.
How can you be sure of a price rise in the short to medium term? What will happen once central banks change their policies or if institutional investors suddenly turn away from cryptocurrency?
Bitcoin remains an extremely volatile and risky asset. Its not-so-distant history proves that…
Over the course of 2017, its share price has risen from 998 $ à 19 114 $ (price as of December 18, 2017).
In mid-January 2018, within a month, we see a real fall in Bitcoin to $11,490.
This fall in Bitcoin continued, throughout 2018, with the value approaching the 4 000 $ at the end of the year.
Imagine the loss of capital for investors who bought the cryptocurrency in December 2017! Those who wish to speculate with this financial asset should have the basics of trading, and for some a trading education should be a prerequisite.
What state of mind did they end up in?
Past performance is no indication of future performance.
And then, as with stocks, buying in a period of rising prices is rarely conducive to making interesting capital gains.
As Warren Buffet says: “Be fearful when others are greedy. Be greedy when others are fearful.”
The Autorité des Marchés Financiers (AMF) warns retail investors and informs them of the significant risks of volatility.
This currency escapes the control of central banks, of all classical financial and banking regulations, institutional.
Unlike a stock or a bond, cryptocurrency has no intrinsic value. Its price is not based on anything tangible.
Many economists see this development a speculative bubble.
If this bubble bursts, it’s unlikely you’ll be able to turn around and ask a traditional financial player for help in dealing with a Bitcoin crash.
Now, the only question that remains is: are you willing to take that risk?