After witnessing the historic fall of over 50% on 12th March (Black Thursday), Bitcoin has gradually ramped up and arguably has shown consistent upward movement. There are a number of factors which are fuelling this growth:
Unlimited Fed’s Stimulus acting as ‘Bazooka killing the Virus Infection’:
Covid-19 pandemic has caused stress on the businesses with lockdowns all over the world and demand drying up for the bulk of the services and products. Further, the visibility of demand revival is low with any preventive vaccine being at least 12 – 18 months away from hitting the market.
Fed approved the largest stimulus package in American history on 26th March which has boosted all asset classes including stocks, crypto currencies, gold, etc. It seems like that the Fed is going to expand its balance sheet by buying bonds from corporates, small businesses, etc which would end up stretching the size of its balance sheet to 10 trillion before the US is able to sail through this pandemic. Even after this, the economy might barely revive with towering inflation making it actually debatable whether the stimulus really helping the economic recovery.
This shall lead to a major debasement in the real value of the dollar, and people’s cash holdings will actually lose a significant amount of value.
Crypto investor and chief executive of bitcoin hedge fund Galaxy Digital, Mike Novogratz says “If there was ever a time—debasement of fiat currencies, monetization of trillions of dollars of debt, this is the time for bitcoin, If at the end of the year bitcoin’s not a lot higher, I’m going to scratch my head and say, ‘Look, what the heck is going on?’”
Anthony Pompliano, a well-known bitcoin bull and partner at bitcoin and crypto-focused hedge fund Morgan Creek Digital said “The Fed’s $6 trillion stimulus plan would be enough to buy the entire market cap of Bitcoin more than 48 times,”
Much Awaited Bitcoin Halving in May:
For beginners, Bitcojn halving event is when the number of new Bitcoin created for mining every new block every 10 mins gets reduced to half. This issuance of new Bitcoin rate is scheduled every 210,000 blocks, which is roughly 4 years. This year it is scheduled around 18th May, 2020 when the total number of mined blocks will hit 630,000. Bitcoin halvings will occur till 2140 when all the 21 million Bitcoins have been mined.
As there are going to be only 21 million Bitcoins ever, the halving event reduces the inflow of new coins in the system by half which further increases the scarcity of Bitcoin and thus making it more valuable.
Said that, there are two theories or schools of thought to justify the increase in Bitcoin price with respect to halving.
First relating to the viability for existing miners to counter their business viability if the Bitcoin price doesn’t correct in the near term. Nevertheless, the underlying blockchain software is self adjusting and shall reduce the mining difficulty levels to a point where it becomes viable for the efficient miners to continue to run the operations.
Second being only efficient miners staying in the business and inefficient miners moving out of the system. This shall decrease the selling pressure on Bitcoin as the efficient miners shall be more profitable and to that extent would have to spend less.
Unprecedented Dollar Appreciation
Since the beginning of crisis, most of the world currencies have lost tremendous value with respect to the dollar. To give you a perspective, INR has depreciated by 10% from 68 to 76 per USD. Similar trend has been seen across currencies including EUR, AUD and so on.
This has resulted in corresponding increase in investment value in local currencies for non-US residents. In India, the investment value has increased by 10% just by virtue of this currency depreciation
Bears remaining in control of the Stock Market
In the wake of covid-19 situation, the global stock markets are envisaged to remain subdued for the better part of the year with continued slowdown expected, people remaining cautious about stepping out, tad increase in unemployment ratios.
Public market institutional investors will start looking at bitcoin and crypto space as an important asset class to diversify their portfolio. Even if investors start allocating 2% of their global portfilio in crypto space, we can expect the overall crypto market to increase considerably
Former Facebook executive Chamath Palihapitiya recently stated that there’s now a five or ten percent chance that Bitcoin will be worth millions of dollars one day