2021 is only halfway through but the cryptocurrency has already experienced staggering volatility.
The price of Bitcoin, the biggest digital currency by market value, started the year at around $30,000, only to more than double and hit north of $60,000 by mid-April. Since then, the cryptocurrency has tumbled to around $30,000 again.
Let’s take a look at some of the key indicators, predictions, and possibilities for Bitcoin and other cryptocurrencies in 2021.
Past Crypto Trends
Anyone keeping track of Bitcoin likely remembers the bull run of 2017, during which the cryptocurrency reached a high of nearly $20,000. Much of that rally was fueled by hype over initial coin offerings (ICOs) and people who hoped to benefit in the short term. ICOs are when companies raise funds by issuing new tokens to investors who become backers of the blockchain project.
After the ICO bubble popped, Bitcoin’s price crashed in early 2018. Market observers commented that as a new market and industry, cryptocurrencies would see some turbulence and could take time to establish credibility.
Facebook announced its Libra cryptocurrency project in 2019, which contributed to another Bitcoin rally. However, when some supporters of the Libra project backed out and Congress questioned CEO Mark Zuckerberg about regulatory concerns, Bitcoin’s price declined to $6,000 and $7,500 in the second half of the year.
Bitcoin climbed to a new record in 2020, as stimulus packages meant to prop up economies during the Covid-19 pandemic made its way into fringe markets like cryptocurrencies.
However, there were also signs that different types of cryptocurrencies were gaining wider mainstream acceptance. Prominent investors announced they were buying Bitcoin as a hedge, and payment providers like PayPal announced they would allow customers to use cryptocurrencies.
What Determines Bitcoin’s Price?
Numerous factors affect Bitcoin’s price, and since it is a global currency the market can be affected by events around the world. No central actor determines Bitcoin’s price; it’s set by the market. The price can also vary from one exchange to another.
The main factor that determines Bitcoin’s price is whether investors want to buy or not. If good news comes out about Bitcoin or other cryptocurrencies, or bad news comes out about another type of investment, that can cause people to buy Bitcoins and hike the price up.
Conversely, bad news about cryptocurrencies can cause people to sell. News doesn’t necessarily have to be overtly negative to spook the market, either.
Similarly, the rules of supply and demand affect the Bitcoin market. Only 21 million Bitcoins will ever be created, and if investors see a strong long-term market for Bitcoin, they want to own a piece of the pie.
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Although Bitcoin is the best known cryptocurrency, there are thousands of other altcoins available on the market. When good news comes out about other projects, investors sell off some of their Bitcoin to purchase altcoins. In 2021, altcoins like Dogecoin had a spectacular rally as fans and investors promoted the coin on social-media platforms.
Also, new projects offer ICOs which can sometimes have a high return in a short amount of time. If a promising ICO comes to market, it can draw attention away from Bitcoin.
Both large financial institutions and individual investors can have an effect on the market. Some Bitcoin holders, known as “whales,” own a significant enough amount of Bitcoin that they can move Bitcoin’s price if they make a large purchase or sale.
There have been cases of whales causing the market to temporarily crash when they sold off large amounts of Bitcoin.
Cost of Production
The main costs associated with producing Bitcoins are electricity and mining equipment. Although Bitcoin is a digital currency, it must still be mined. The way Bitcoin is designed, only about one block of Bitcoins can be mined every ten minutes.
If more miners join the network, the more competitive mining becomes, which makes the cost of producing each Bitcoin more expensive. Miners have to invest in new, faster equipment and are less likely to receive a pay out. These costs have an effect on Bitcoin’s price.
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Each country has different definitions and regulations for Bitcoin and cryptocurrencies. When news comes out about regulatory decisions, it can cause investors to buy or sell. It is important to note that cryptocurrency is currently unregulated.
Cryptocurrencies faced regulatory hurdles in the U.S. in 2021. The Securities and Exchange Commission rejected several applications for a Bitcoin exchange-traded fund, damping hopes that an ETF version of the cryptocurrency will be trading on U.S. stock exchanges anytime soon.
In addition, cryptocurrencies experienced volatility after China clamped down on the market, issuing warnings about trading and mining.
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Fiat Currency Crises
Bitcoin has become the preferred currency for many people around the world who may not have access to banking, or who are living in a country going through a fiat currency crisis.
In Venezuela, for example, Bitcoin’s popularity has grown as inflation and sanctions have resulted in the devaluation of the Venezuelan Bolivar.
What’s Holding Bitcoin Back?
A few factors have been holding Bitcoin back from seeing any significant growth over the past year. Some of these are predicted to take steps forward in 2021.
Adoption and Use
Since Bitcoin is a new technology, it takes time for companies to build up tools and use cases for it. At this point, the infrastructure is getting stronger and it’s easy for novice investors to buy and sell Bitcoin at the touch of a button. Take for instance, the PayPal announcement in 2020.
However, many people holding Bitcoin haven’t wanted to use it for everyday purchases because they view it as a long-term, safe-haven investment with a lot of potential upside. It should be noted that investing in Bitcoin and other cryptocurrencies is inherently very risky given the historic large price movements over short periods of time.
There also weren’t many retailers who would accept Bitcoin. Now, you can use bitcoin or other cryptocurrencies at Starbucks, Amazon, Nordstrom, and countless other retailers. However, there’s volatility in this area as well, with Tesla making a U-turn in 2021 on whether the electric-car maker will accept Bitcoin as payment.
Lack of Clear Regulation
Experienced investors tend to be very careful about what they invest in. If an asset doesn’t have clear legal regulations, they may not choose to take the risk of investing in it.
Regulations still are not clear with cryptocurrency, so that could be an important consideration for investors.
Waiting on Institutions
If large corporations start holding some of their wealth in Bitcoin, or financial institutions demonstrate support of cryptocurrencies, that adds legitimacy, which could drive new investors to the market.
A survey released in 2020 by Fidelity Investments found that 27% of institutional investors–including pension funds, family offices, investment advisers and hedge funds–owned digital assets like Bitcoin. The figure was up from 22% in the prior year.
However, a separate survey by JPMorgan released in 2021 found that 78% of institutional investors are not planning on investing in crypto. However, the survey also found that a majority also think crypto is “here to stay.”
What Will Happen in 2021?
This year presents an interesting combination of both global events and cryptocurrency-specific happenings.
The US Economy
The US is facing a number of major unknowns this year. With the economy still emerging from pandemic quarantine measures and speculation that asset prices have reached inflated levels, how will all of this affect the price of Bitcoin?
Some economists believe that a US recession will be rocket fuel for a Bitcoin bull run. If investors lose faith in the US dollar and the stock market, they may turn to the cryptocurrency market as a safe haven.
Since Bitcoin is a global currency, it can potentially ride out individual national economic crises and be that safe haven. However, if a recession hits, money might become tight, causing people to sell their Bitcoins.
Key Technical Indicators
Some technical indicators can signal that Bitcoin is heading towards a bull run. Bitcoin has been reaching higher lows as well as other positive trends.
However, technicals are not always trustworthy predictions. Depending on how you combine charts and analysis, the market can also look like it’s heading towards a downward spiral.
As mentioned, China has been cracking down on the cryptocurrency market, causing volatility in prices. Meanwhile, some market observers expect more regulatory measures down the road.
Stablecoins Around the World
Numerous countries are considering developing or already working on their own digital currencies and stable coins. The US, Russia and France and other nations have all announced plans to enter the digital currency market. China is probably the farthest along out of the major economies, having launched a central bank digital currency (CBDC).
As these projects progress, they could add legitimacy to the market and challenge some fiat currencies. Bitcoin’s price may go up in the short term as these announcements come out, but whether its value will hold in the long run as the world transitions towards digital currency has yet to be seen.
Of course, Bitcoin is not the only game in town and other players are giving it a run for its money.
The second and third-most-valuable cryptocurrencies are Ethereum and Tether. Ethereum has had a boom given the interest in non-fungible tokens, or NFTs, digital versions of art or collectibles that are linked to a blockchain. Tether, meanwhile, is a stablecoin that has a fixed value to the US dollar.
Dogecoin had a meteoric rise in 2021, mostly fueled by social platforms that have also been behind the rallies of meme stocks like GameStop and AMC. Elon Musk was a proponent before an appearance on the TV show Saturday Night Live, when he called Dogecoin a “hustle.” Since such developments, the price of Dogecoin has suffered, losing much of its value.
Cardano has also had a big rally and become one of the largest cryptocurrencies by market cap. It’s expected to have some features that make it the basis for decentralized finance (DeFi) and NFT projects. It’s another coin that developed a following on social-media platforms like Reddit.
As is the case with any investment, it’s crucial for investors to do their own research and take expert predictions with a grain of salt. The cryptocurrency market is still in its infancy, so there isn’t much data to go on when making predictions, and unpredictable circumstances can have significant effects on the market.
Bitcoin is a risky investment. Investors should consider making their own decisions about their level of risk based on a proper analysis of all the various factors that come into play.
The past is not a prediction of the future, and just because trend lines indicate a bull run is coming doesn’t mean they’re correct. In such a complex, fast-changing market, it’s important to stay informed and do due diligence.
2021 is looking to continue to be an eventful year for Bitcoin and cryptocurrencies. For keeping track of the market, buying crypto, or just desiring to stick to a more traditional portfolio of assets, there are helpful tools available for achieving those goals.
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