As we see that Bitcoin keeps breaking previous all-time highs, it is a good time to take a look at what keeps pushing these big price movements.
The first big difference we see in comparison with the parabolic movement of 2017 is that more and more institutional investors, traditional institutions and multinationals like Tesla are starting to embrace Bitcoin as a legitimate asset class. Taking this trend into account and looking at the fact that payment providers such as paypal now also offer Bitcoin and other cryptocurrencies in their services, it will be almost inevitable that even banks will soon have to take the decision to embrace Bitcoin.
But why does Bitcoin keep growing in popularity? As it is clear that the cryptocurrency market is still searching for its place in terms of asset allocation spectrum, many market observers and billionaire hedge fund managers like Paul Tudor Jones compare the digital currency to gold. Traditionally precious metals like gold and silver are used as an inflation hedge, which could partially explain why Bitcoin’s price is rising without effort as it is clear that the COVID crisis and connected stimulus packages are pushing inflation in the nearby future…
The reason why Bitcoin is often compared with gold is because of the scarcity built into the system. Even more so, Bitcoin could be seen as more scarce, because gold does not yet have a ceiling to supply, while the maximum supply of Bitcoin is limited to 21 million BTC… Both Bitcoin and gold can be held outside of the traditional financial markets and have values that are impossible to compare to ‘traditional currencies’ like the euro and dollar because central banks can increase money supply to their own will.
Last but not least, many investors believe that Stock-to-Flow ratio can be applied to the digital currency because it was the very first scarce digital item ever developed. This Ratio is also used with commodities such as gold because these are known as ‘store of value’ as they can retain value for a long time due to their relative scarcity. It is difficult to increase the supply as the process of gold searching and mining is expensive and time consuming. Stock-to-flow ratios are used to evaluate the current stock of a commodity (circulating supply) against the flow of new production (mined). A higher ratio indicates that the raw material is becoming increasingly scarce – and therefore more valuable as a store of value. Because of this we can create a chart that can show a general price compared with the model of Bitcoin.
As you can see on the chart, the price has always followed the ratios in the past and because of that it looks like Bitcoin is indeed a very interesting long term asset to have in an investors portfolio. As a final conclusion we can certainly deduce from recent years that Bitcoin and other fundamentally strong altcoins with different use cases for blockchain technology are here to stay.
Get in touch if you want legal creative tax advice about investing in digital assets, or contact Satoshi Consultancy for any other inquiries about investing and trading cryptocurrency in a safe and well-founded way.
About the Author: Stephan De Haes, Founder Satoshi consultancy Ltd.
Stephan has built up all-round Cryptocurrency experience over the years thanks to collaborations with international companies and individuals from different layers of the Cryptocurrency industry. After familiarizing himself with every aspect of investing and trading cryptocurrency, he decided to establish “Satoshi Consultancy” to share his cryptocurrency experience and knowledge with groups and individuals seeking personalized guidance and education about this innovative asset class.