Three Factors Driving Phenomenal Bitcoin Rally

Tuesday, 16 February 2021, 4:46 pm
Opinion: Kalkine

• Bitcoin delivered a better-than-expected return of over 290% in 2020, surpassing gold that generated 25% return.
• Bitcoin prices appear to be rallying on the back of near-zero interest rate environment, growing institutional interest and its increased acceptance as a means of payment.
• The risk of potential bubble burst exists given the past experience of the crypto market crash in 2017.

Of all the assets an individual can invest in, none has delivered as much return as Bitcoin in such a short span of time. The beloved cryptocurrency has produced a 1-year return of about 380% and six-month return of around 300%, with the pandemic-hit environment setting a perfect stage for digital currency growth.

Bitcoin seems to be challenging the safe-haven status of gold, which has been long considered as a ready-to-own asset when fiat currencies are being devalued. While the yellow metal generated a decent return of 25% in 2020, Bitcoin delivered a greater-than-expected return of over 290% last year.

The meteoric rise of the Bitcoin has lured many companies and investors towards the crypto market, giving some mainstream acceptance to the digital currency. At the time when the crypto space is getting spiced up each passing day with a plethora of information surfacing in the market, it seems crucial to track down the key reasons behind the Bitcoin rally:

Low-Interest Rate Environment

The near-zero interest rates prevailing across the globe appears to have delivered a much-needed push to the crypto space. The COVID-19 pandemic forced central banks worldwide to push benchmark interest rates to record-low levels to stimulate growth amid economic decline.

These ultra-low interest rates encouraged investors to turn away from interest-being investments to alternative assets like Bitcoin. Also, investors used Bitcoin to hedge against currency debasement and potential inflation amid COVID-19.

In addition to implementing low-interest rates, central banks also engaged in asset-buying programs during the pandemic to improve liquidity in the market, potentially benefitting crypto assets.

All in all, the unprecedented monetary support from central banks opened a golden window for investors to enter the crypto market. The recent decision by the US Fed to keep interest rates unchanged is further expected to retain investors’ interest in the burgeoning crypto space..

Growing Institutional Adoption

Over the recent months, there has been a spectacular growth in institutional adoption of crypto assets, with several renowned companies converting their cash treasuries into digital currency.

The latest to make the headlines was the US electric car maker Tesla Inc, which announced an investment of USD 1.5 billion in Bitcoin. Interestingly, this is the biggest investment in Bitcoin by a mainstream corporation so far. Tesla also intends to begin accepting the popular cryptocurrency as a payment option for its products. The automaker’s move was welcomed by investors, that pushed Bitcoin’s price to an all-time high level of USD 48,000 last week.

Besides Tesla, US-based insurance company Massachusetts Mutual also unveiled a USD 100 million investment in Bitcoin in December 2020 for its general investment account. Given the insurance giant’s prior practice to invest in tried-and-tested financial products, this investment further stimulated institutional interest in digital currencies.

Without a doubt, the recent investments by these big cheeses have been driving other companies’ interest in the buoyant crypto market. Besides, cryptocurrency is expected to become more mainstream with multiple countries looking forward to regulate the market.

Acceptance as Form of Payment

In recent times, Bitcoin and other digital currencies have been increasingly embraced as a means of payment by companies across the globe.

The interest in crypto space has improved considerably since the digital payments company PayPal announced its plans to launch crypto buying and selling features on its platform in October 2020. PayPal now permits its customers to buy, sell and hold Bitcoin from their PayPal accounts directly.

Much like PayPal, payments giant Mastercard also disclosed its plans to begin supporting certain cryptocurrencies directly on its network in 2021. While Mastercard already holds a partnership with crypto card providers like BitPay and Wirex, it requires cryptocurrencies to be switched into fiat prior to processing payments for transactions on its network. Mastercard’s latest move will enable its customers’ crypto payments to be settled in digital currency at participating merchants.

Hopping onto the crypto bandwagon, Bank of New York Mellon Corp. also recently revealed that it would issue, transfer, and hold Bitcoin and other digital currencies for institutional customers.

With several companies taking a positive stance towards crypto space, Bitcoin may emerge as a promising alternative to traditional currencies that are currently ruling the financial world. The recent crypto announcements by these finance-based companies are indicative of this potential transformation.

Bottom Line

With Bitcoin garnering popularity and setting new records, some of the brightest minds on the earth are exhibiting interest in the crypto market. Speculations are rife that Bitcoin will remain a lucrative alternative for investors as a store of value in case the interest rates remain low.

However, one need not neglect the wild price swings and extreme volatility associated with cryptocurrencies. Additionally, the risk of potential burst in the Bitcoin bubble cannot be ignored given the experience of 2017 crypto market crash.

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