Despite the pandemic, 2020 has been a good year for investors. Part of this is due to retail investors expanding into the market — many of whom have had the time to use simple interfaces now available on computers, tablets, and smartphones. But that isn’t the reason for all that has happened — especially in the cryptocurrency market.
Bitcoin has been on a bull run for the last half of 2020. For the whole year, its price has increased more than 400%. But at the start of 2021, after a jump it, its price went down slight. So traders wonder if 2021 will be as bullish as 2020 or if it will see a crash as it did three years ago.
What is Bitcoin?
Bitcoin is a cryptocurrency. Cryptocurrency is a digital currency. Bitcoins are not carried around with us like regular currency. They are stored in a database or transparent ledger known as a blockchain.
Similarly, Bitcoins aren’t minted but rather they are mined. Bitcoin miners use sophisticated software to solve complex math problems. When a math problem or puzzle is solved, the miner is awarded Bitcoins. As of late 2020, the reward is 6.25 Bitcoins.
Holders of Bitcoins keep them in digital wallets. When they want to use Bitcoin for a purchase, it is all done digitally. Founded in 2009, during the Great Recession, Bitcoins are not backed by any government or banks.
Bitcoin promises that it cannot be manipulated by government actions or central banks and is immune to inflation. Another advantage to Bitcoin is there are fewer transaction fees since there are no middlemen. However, as with most things related to Bitcoin, there are disagreements and things are usually more complicated than they seem.
Bitcoin Price History
In October 2009, Bitcoin was almost worthless since no one was willing to buy it. A Finnish developer who helped with the origination of Bitcoin sold 5,050 Bitcoins for $5.02. This gave Bitcoin a value of 0.09¢.
Another pivotal day in Bitcoin history occurred on May 22, 2010. On this day, a Florida programmer purchased two Papa John’s pizzas for 10,000 Bitcoins. It was more of a novelty than anything else, however.
Today, in late December 2020, the Bitcoins spent on those pizzas are worth approximately $289 million. In between, Bitcoin has seen some dramatic ups and downs in price movement. Cryptocurrency enthusiasts call May 22 Pizza Day.
In February 2011, Bitcoin closed above $1.00 for the first time. During the first few years, Bitcoin meandered in the single digits with a brief pop to $31 in June 2011. It then began an impressive rise in price.
Bitcoin hit $200 in April 2013 and then jumped to more than $1,000 by November of that year. In November 2017, it crossed $10,000 on the way to a then all-time high of $19,783 on December 17, 2017.
At that point, it fell back down to $3,441 by January 2019. The peak in price is believed to have been caused by possible manipulations. Others say it was just investor fervor. Many have compared that Bitcoin bubble to the internet boom of the 1990s.
By June 2019, Bitcoin had recovered to around $12,000. It fell into 2020 and then took another hit because of the COVID-19 pandemic. Then it started to take off. In October 2020, it was trading at $13,500, and at the close of the day on December 30, 2020, it reached an all-time high of roughly $29,500.
How to Trade Bitcoin
There are a variety of ways traders can speculate on Bitcoin, like:
- Day trading
- Options
- Contracts for difference (CFDs)
- Trend trading.
Day trading refers to short-term trading that occurs over seconds, minutes, hours, or a few days. The trader can make small but consistent gains by taking advantage of the volatile price movements of Bitcoin each day.
Basic options trading is the buying of call or put options. A trader will buy a call option if they believe the price of Bitcoin will go up in a certain time frame. A put option is bought when a trader believes the price will fall by the option’s expiration date. There are more complex option trading strategies like straddles and butterflies that involve the buying and selling of options at the same time.
Traders can profit from the price movement of Bitcoin by using CFDs (contracts-for-difference).. Traders will buy a CFD if they believe the price is going up, and they will sell or go short when they think the price of Bitcoin will drop. CFDs involve leverage and margin, which means they can be risky if the trade starts to go against them.
Trend trading involves understanding the price movement of Bitcoin. This usually involves charting and technical analysis. When certain patterns develop on the chart, the trader will buy or sell Bitcoin, depending on what the chart tells them.
What’s Next for Bitcoin?
Now that bitcoin has gained roughly 400% in 2020, can it continue higher? Will Bitcoin go to $100,000, or is there a chance of a repeat of the 2017 crash?
“Bitcoin Will Rise”
Today, there is more trust in Bitcoin. A recent announcement by PayPal stated that they will allow users to draw from Bitcoin and other cryptocurrency accounts to pay for products using PayPal at over 28 million merchants.
Unlike 2017, major investors including, Harvard University and billionaires like Paul Tudor Jones, have been adding cryptocurrencies to their portfolios. Some public companies are also adding Bitcoin to their balance sheets. At the same time, normal Bitcoin skeptics have been quiet.
One argument has been that Bitcoin will catch up to gold in market capitalization once Bitcoin is widely accepted as the digital version of gold. Currently, the market cap for gold is $9 trillion. Could Bitcoin rise to 20% to 25% of gold in the next year? If so, Bitcoin would be at $80,000 to $110,000.
“Bitcoin Will Crash”
Bitcoin enthusiasts promote the idea it is “sound money” — in other words, it is durable, accessible, divisible, scarce, and verifiable. If any one of those characteristics is compromised, the basic foundation of Bitcoin will either erode or disappear.
Another risk for Bitcoin is the concentration of mining power. It is believed that 65% of the hash power or mining computer power is in China. Theoretically, groups of miners could create fake coins through double-spending or manipulate transactions. Another risk is whales or investors manipulating the market.
Conclusion
Given the increasing interest from institutional investors, the long-term future for Bitcoin — and other digital assets — seems positive. In the short-term, recall that all cryptocurrencies are volatile and Bitcoin is famous for its roller-coaster moves.
