Bitcoin’s rebound: 3 reasons this bubble may not burst

Bitcoin is back.  Three years after the bubble that inflated its value from US$5,000 to US$20,000 in less than three months burst in spectacular fashion, plunging more than 80%, the cryptocurrency is again on the verge of a record high.

In recent days it has been trading above US$19,000, up from US$10,000 in October and US$5,900 in March. The price of Ethereum, the second-largest cryptocurrency by market value, has also surged over the past few months, up from less than US$250 in July to about US$600.

Cryptocurrency markets are notoriously volatile, so perhaps by the time you read this the value might have gone up. Or down again.

So what is going on? Is this another speculative bubble, fuelled by the “greater fool theory”?

Not necessarily. Unlike the 2017 bubble – when there was a lot of noise and excitement based on not very much actual mainstream adoption – there’s more substance to cryptocurrency price rises this time.

Three basic trends can be discerned behind this change of heart.

1. Digital money is coming

First, there is the economic impact of COVID-19 and governments pumping massive amounts of money into economies. With investments such as property, savings and bonds less attractive, investors have been looking to assets with better prospects.

Money has been flooding towards traditional “safe-haven” assets such as gold as well as stocks aligned with the digital economy. Among the most favoured stocks: Apple, Microsoft, Amazon, Etsy, PayPal and Zoom. Bitcoin offers aspects of both.

The dramatic increase in online shopping and cashless payments due to COVID-19 has also accelerated interest in digital money.

2. The technology is maturing

Second, the technology that supports cryptocurrencies is maturing.

One of the biggest problems for cryptocurrencies becoming mainstream is the sheer amount of energy-intensive computing processes required to make transactions secure (which is important as you don’t want the same token spent twice). The carbon emissions from Bitcoin mining  have been estimated  as more than that of a country such as Sri Lanka.

3. Institutions see its value

Third – as illustrated by the changed stance at JPMorgan Chase – institutional investors are now embracing cryptocurrency.

As Rick Rieder, chief executive of BlackRock, the world’s largest investment funds manager (more than US$7.4 trillion in assets under management) declared, ” cryptocurrency is here to stay”.