Cryptocurrencies have always been one of the most fascinating and controversial aspects of the blockchain space. Since their early days they have had to endure ridicule, criticism, doubts and heavy scrutiny. They have been repeatedly dismissed by key figures in the traditional investing circles, closely watched by regulators and even restricted in certain regions. Even within the blockchain community there have been many voices treating crypto as an unfortunate byproduct of distributed ledger technologies.
Yet, seemingly against all odds, cryptocurrencies have remained at the center of the blockchain debate, attracting ever-growing attention. They have survived market bubbles, crypto winters, hard forks, exchange hacks and regulatory crackdowns, and have grown to become a $1-trillion market and one of the best performing asset classes around.
The question, as always, revolves around whether this seemingly unstoppable march is sustainable in the long run. Will the cryptocurrency prices keep rising or will the market come crashing down at the end? Well, to answer that question, we first need to identify the factors driving the latest crypto bull run.
To the Moon!
At the time of writing, the Bitcoin price was sitting at around $51,500, having gained over 50% since the beginning of the month. Ether was hovering around $1,800, just under a fresh all-time high that had been reached on Saturday. Cryptocurrency prices had gone through the roof.
We’ll talk more about the current situation on the crypto market in a minute, but first it is important to recognize that the latest bull market is part of a larger upward trend that started developing toward the end of last year. In general, 2020 was a great year for the market, as cryptocurrency prices steadied amid increasing investor confidence. Yet, nothing hinted at the spike that was about to materialize in late 2020 and the early days of this year.
The Bitcoin price, for example, spent the first half of December consolidating after a strong month of November, which had brought its 2017 high into view. Analysts were speculating that a break above the $20,000 barrier could become a catalyst for a major move forward. Then, the break actually materialized and the floodgates sprung open. Bitcoin not only shattered the $20,00 barrier, but it also more than doubled its previous price record, topping $40,000 in early January. Now the price has risen again, setting, for the first time, a high above the $50,000 mark. With some exceptions, the rest of the market has followed suit, with many cryptocurrency prices experiencing spikes and setting fresh highs.
When it comes to the crypto market, history has shown that such an explosive growth is not always a good thing. After all, the last time the market rocketed toward the Moon, it barely survived the subsequent freefall. And since the current bull market actually dwarves the 2017-2018 crypto boom, who’s to say that there wouldn’t be an even harder fall? Well, let’s see if things might turn differently this time around.
Institutional investment drives cryptocurrency prices up
Of course, we need to address the most recent events, which put an end to a brief market correction, allowing Bitcoin to break above the $50,000 mark and propelling other cryptocurrency prices into uncharted territory. The upward move was seemingly prompted by Tesla’s founder and CEO Elon Musk, who earlier this month showed support for Bitcoin on Twitter. This is not something new, mind you, as we’ve seen in the past how comments from prominent figures in the blockchain and tech sectors like Charlie Lee and Jack Dorsey can have an impact on short term price movements. Of course, an influential figure of Musk’s caliber has a far longer reach and his positive comments can instill confidence in a wider range of investors. But you know what inspires confidence better than words? That’s right, actions.
On February 8, Tesla announced that it had purchased $1.5 billion in Bitcoin. The announcement sent shockwaves across the crypto sector and led to a more than 10% increase in the price of Bitcoin. Such a large investment sends a strong signal and could prompt other big companies to follow suit.
Tesla’s purchase made the automaker the second-largest corporate Bitcoin holder, trailing only MicroStrategy, which has $3.1 billion worth of the cryptocurrency. MicroStrategy has been investing in Bitcoin as part of an effort to diversify its treasury reserve. In fact, MicroStrategy’s December 21 announcement that it had invested roughly $650 million to increase its Bitcoin reserve contributed strongly to the previous bull run. Furthermore, the company yesterday announced plans to sell $600 million convertible debt and use the proceeds to buy more Bitcoin – a move that likely contributed to BTC’s leap above the $50,000 mark.
Economic stimulus measures aimed at combating the Covid-19 crisis have also contributed to the market turnaround in 2020. With central banks in the US, Europe and other regions printing money to provide economic relief for those affected by the pandemic, people have turned to other assets, seeking a store of value and decent return on investment. The rising valuations across the stock markets have been indicative of people’s growing appetite for investments. Cryptocurrencies are especially attractive as a potential store of value, as their low correlation to traditional financial markets makes them ideal for alternative investments.
With the pandemic far from over, plans for further stimulus are being put in place. This suggests that cryptocurrencies are likely to keep their investment appeal for the foreseeable future.
The year of DeFi
Historically, other cryptocurrency prices have tracked the Bitcoin price, which partly explains some of the recent moves in the altcoin space. However, other major crypto coins have also seen significant developments over the past few months.
One such development, centered around Ethereum, was the DeFi boom of last year. The growing popularity of decentralized finance applications could also be explained, at least partly, with people’s desire to find alternative sources of income during a pandemic. DeFi’s appeal appears to go beyond that, however. The implied goal of democratizing finance is bound to attract significant interest, especially from people who lack easy access to financial services, and is in line with the original vision for blockchain proposed by Bitcoin more than a decade ago.
While it’s difficult to assess the direct impact the DeFi boom has had on cryptocurrency prices and particularly Ether, it is undeniable that the rising popularity of decentralized finance has helped draw more attention to the crypto space as a whole. According to DeFi Pulse, there were roughly $40 billion worth of crypto locked in DeFi contracts, at the time of writing.
The DeFi boom draws another parallel to 2017, this time with the ICO craze that bloomed in full that year. At first glance, this might invite some concerns, as we all remember how the ICO bubble popped. The case for DeFi already appears to be a lot stronger, however, as the space has already produced a number of practical applications that are making a real impact.
Do you have an idea for a DeFi product? Do not hesitate to contact us at [email protected]. We’ll be happy to assist!
Perhaps the biggest development in the blockchain space last year was also related to Ethereum. The launch of the Beacon chain kicked off Ethereum’s Eth 2.0 journey and the protocol’s transition to proof-of-stake. This significant breakthrough contributed to the strength of the market, especially as it happened ahead of the initial schedule. If the Ethereum 2.0 project continues to hit its milestones on schedule, it will likely continue to support the market sentiment throughout this year and the next.
In more immediate terms, the launch of the Beacon chain has opened the door to Ethereum staking, creating another avenue for people to support the second-largest blockchain network and earn token rewards in the process. The launch is already impacting the crypto space, prompting both start-ups and more established crypto businesses to jump on the opportunity to offer Ethereum staking services.
According to data from the Eth2 Launch Pad, more than 3 million ETH have already been staked in the Beacon Chain.
The December-January rally, which included the first Bitcoin breach of the $40,000 barrier, was followed by a sizable correction for all cryptocurrency prices. This behavior is common across financial markets, as there are always investors looking to cash in their investments following a bull run. The fact that the crypto correction seen in the second half of January was a relatively modest one suggests that the preceding rally had some healthy momentum behind it.
One notable exception was XRP, whose price in late November hit $0.70 for the first time in over two years, but then plummeted towards the $0.20 mark after Ripple, the US company that created the token, was charged in December by the US Securities and Exchange Commission with conducting $1.3-billion unregistered securities offering. Ripple has issued a formal response, denying the allegations.
Despite these issues, XRP has been able to recover some of its losses and is currently trading at around $0.50.
Apart from the ‘big two’, the market has seen other major crypto assets making notable moves. Cardano (ADA) and polkadot (DOT), for example, have both leapfrogged XRP to join the crypto top 5, benefiting from an increased demand for viable Ethereum alternatives.
Speaking of Ethereum, the ETH price received a boost earlier this month, after the Chicago Mercantile Exchange (CME) finally launched its much-anticipated ether futures.
Why this rally matters
For some it may seem justified to dismiss cryptocurrencies as an auxiliary function of blockchain technology or to feel exhausted by the constant hype and drama surrounding cryptocurrency prices. Blockchain, after all, is capable of so much more, so why focus on just one aspect of the technology?
Well, consider the other side of the coin. Consider that cryptocurrencies are a key element of blockchain technology, as they are what fuels the economic side of a blockchain system or application (by incentivizing proper system maintenance, powering smart contracts, etc.). That they are, arguably, the focus of the original use case for blockchain, laid out in Satoshi Nakamoto’s seminal whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”. That if cryptocurrencies succeed in the world of finance, where everything seems stacked against them, that would be the ultimate demonstration of the power and utility of blockchain technology.
Cryptocurrencies have been here before and we all know how previous bull runs have ended. The 2017 surge, the ICO bubble, and the crypto winter that followed are still fresh in our memories and should absolutely serve as a cautionary tale. But cryptocurrencies have endured and it’s remarkable that after more than 10 years of drama, controversy, and uncertainty, after countless highs and lows, the crypto market is now at the highest level it’s ever been.