Is The Bitcoin Bubble About To Burst?

Is the Bitcoin bubble about to burst? A currency analyst weighs in. 

It’s the question on every investor’s mind at the moment. And as is usually the case with cryptocurrencies, there is no universal answer to this question.

As retail and institutional awareness of Bitcoin grows, investors are becoming increasingly divided between 'crypto optimists' and 'crypto sceptics'. This has been spurred on recently by the recent performance of Bitcoin.

Despite its historic nature as a volatile, unregulated asset prone to sharp swings, Bitcoin’s record breaking price gains has investors viewing the cryptocurrency in a new light.

During the opening weeks of 2021, the cryptocurrency soared past its previous 2017 highs to reach US$42,000 per Bitcoin for the first time. The billionaire Winkelwoss twins recently said in a CNBC interview that Bitcoin still has a long way to go, and could soar to US$500,000 in the next decade, surpassing gold as a store of value. 

Although Bitcoin’s value has now settled to approximately US$35,000, some are still eager to sing its praises. There is also speculation the price of a single Bitcoin could surpass £50,000 in the coming months. Conversely, sceptics believe an immense bitcoin market correction is imminent as a consequence of what they see to be unsustainable price gains.

So, who is right?

In short, both views hold merit. That’s why one may believe it is important to consider what factors are likely to influence the price of Bitcoin in the near future.   

Firstly, the potential commodity bull cycle and subsequent cheaper US dollar might, depending on how they play out, increase market demand for Bitcoin. This is because investors are likely to seek out assets that can maintain a high capital value.

Secondly, Bitcoin’s quadrennial “halvening” event could lessen supply soon; meaning that any new uptick in demand could see prices soaring once again. The “halvening” refers to the process of the number of new Bitcoins being minted essentially being halved, with the most recent halvening occurring in 2020.

Thirdly, around 90% of the 21 million Bitcoins that will ever be mined have been. This means there is a shrinking supply. By 2140, all bitcoins that can be mined should have been.

Fourthly, the recent trend for all things digital during COVID-19 lockdowns has favoured Bitcoins. If there is a paradigm shift towards digital money, then Bitcoin stands to gain.

Fifthly, Bitcoin capitalisation has tripled to US$600 billion this year. The larger the capitalisation becomes, the more there will be interest from conservative investors.

Sixthly, if stocks do underperform post COVID-19 then BTCUSD offers an alternative store of value that may help see further flows.

And finally, governments the world over have taken on historic levels of debt to help fund their responses to the COVID-19 pandemic and instigation of post-lockdown economic recoveries. As a result, currency inflation could inspire investors to retreat to hard assets and safe assets such as gold, industrial metals, and Bitcoin.

Of course, although it seems likely that the above developments will impact Bitcoin’s value in the coming months; it’s impossible to say for certain. Ultimately, Bitcoin’s appeal lies in its nature as a risky, highly volatile asset, where considerable price gains can be wiped in a number of hours with little in the way of an explanation.

Whether the Bitcoin price soon drops, corrects itself, or increases further, investors keen on acquiring the asset must do so as part of a wider investment strategy. With such a volatile, unpredictable asset, ensuring that one has multiple clear exit plans in place is paramount for avoiding a downfall in any potential Bitcoin bubble-bursting.

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 Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA.

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