Bitcoin has become one of the most valuable assets today. In almost 10 years it has gone from nothing to being crowned the new digital gold, worth thousands of dollars. Bitcoin’s extreme price rise has come as a big surprise for many people but not for BTC enthusiasts. They believe that it will eventually overcome fiat and become the primary currency in the world. At the very least, Bitcoin has slightly made good on their projections by managing to become what many consider to be a digital equivalent of gold.
Over the course of time, the price of Bitcoin has surpassed the shares of countless companies. But here comes a question – what really drives the price of Bitcoin and why will it rise in the future?
The trade war between the US and China
The tension between China and the USA seems to be playing to the advantage of Bitcoin enthusiasts. The price of the cryptocurrency rose by 25% when Donald Trump announced that he would raise tariffs on Chinese imports. At the same time, the Yuan has subsequently fallen to a six month low.
Also, there have been signs that Chinese traders are moving their funds to Bitcoin. This has been backed up by exchange data. According to Dr. Garrick Hileman, BTC prices are trading at a premium on popular Chinese exchanges like Huobi.
The correlation between Yuan and BTC can be seen in the diagram below. It has become more evident in April and May and as the tensions ratcheted up with the weakening of U.S.-China trade relations.
The Bitcoin price rise has coincided with major events and announcements of the trade war:
- May 13 – China announced a tariff increase on $60 bln. worth of American goods. Bitcoin surged 139%.
- June 25 – the US planned to delay extra tariffs on Chinese goods. Bitcoin rose by 40%.
- August 13 – the US delayed setting extra tariffs on Chinese goods because of health, safety, national security and other reasons. BTC rose 123%.
The institutions are behind the wheel of mass adoption and will be the main driver of Bitcoin’s rise in the future. CME notes that the demand for Bitcoin futures among financial institutions is only increasing. Companies which previously were bearish towards cryptocurrencies have been showing much more interest in these assets as a new, legitimate financial tool.
Also, the most anticipated event in the industry is about to happen – the launch of Bakkt’s exchange for institutional traders.
Bakkt has been previously postponed several times and needed more time to meet all regulator’s requirements. As a result, Bakkt will be the very first cryptocurrency exchange fully operating in accordance with all current financial regulations in the US.
Why is that so important? The main obstacle for companies and financial institutions looking to enter the cryptocurrency field was its lack of a regulated environment. Bakkt opens the door to bigger financial players and we can expect a big influx of money into the industry which in turn could lead Bitcoin’s price rising further. You can read more about the effect of Bakkt on Bitcoin and the industry as a whole on our blog.
A decreasing supply
There will only ever be 21 million Bitcoins. The issuance of Bitcoin is limited and can’t be increased by printing like fiat money at a bank. Currently the amount of free Bitcoins is increasing – which is shrinking the supply.
There are more holders and the graphic chart below clearly represents this trend.
The coloured bands represent how many Bitcoins haven’t been spent or moved to another address in a certain time frame. The blue band represents the supply which hasn’t moved for 5 years. Currently 20% of all the Bitcoin supply has been held onto for dear life for many years.
While the number of coins is only growing, the available amount of coins is decreasing. Which increases the demand for Bitcoins thereby increasing the price.
The halving is on its way
In May 2020 the Bitcoin mining block reward will be decreased from 12.5 to 6.25 BTC. The number of Bitcoins mined by miners will be reduced. The previous halving in the summer of 2016 caused a significant Bitcoin price rise a year before the event happened.
PlanB, a well-known Bitcoin market analyst, believes that traders will not wait this time around for the expected reduction in supply.
Front running would be in line with Efficient Market Hypothesis: if you believe S2F and that BTC will be $50k May 2020, why wait.