6 reasons bitcoin is trading at its highest level since 2017 — and 1 warning

Bitcoin is baaack!

The popular digital currency, which is arguably one of the most polarizing in financial markets, is approaching heights not seen since the frenzied rush into cryptocurrencies three years ago.

Bitcoin’s price BTCUSD, 1.37% on Wednesday briefly hit an intraday peak at 18,358.98, and was pulling back in recent trade but still on pace for the fourth-highest finish in its history since December 2017, when the asset briefly flirted with $20,000 before collapsing in dazzling fashion, according to Dow Jones Market Data, based on a 7 p.m. Eastern close.

But now bitcoin is drawing eyeballs and wallets again, outshining gold prices GOLD, -1.74% and the stock market, with a year-to-date advance that has exceeded 150% so far in 2020.

So why does the asset, based on the distributed-ledger technology, suddenly appear ready to surpass its 2017 peak at $19,783?

There are a few key reasons:

Scarcity factor

Bitcoin was created in 2009 and as a part of its creation by a person, or persons, using the name Satoshi Nakamoto, who embedded a limit of 21 million coins in the original bitcoin code. That means only 21 million bitcoin can ever exist. Currently, 18.5 million are in circulation, or nearly 90% of that total.

Bitcoins are digitally mined by those who expend outsize sums of computer power to solve puzzles and who are rewarded with coins in exchange for verifying transactions on the anonymous blockchain network.

Nakamoto designed the coins to be harder to get as the network gets closer to the maximum float. It’s estimated that it will take 120 years to “mine” the remaining 10% of bitcoins needed to get to the 21 million limit.

The perceived scarcity, or supply limit, of an asset doesn’t magically confer value to it. But the belief that there will be fewer opportunities to obtain bitcoin, or that it will reside in the hands of a select few, is often cited as a reason that demand for bitcoins has returned.

Familiarity breeds…buying?

Bitcoin doesn’t have the cachet or tradition of other assets that have been around for much longer, including gold, which boasts a history stretching back thousands of years as a store of value and medium of exchange.

However, bitcoin’s popularity has been growing among average folks and institutional investors alike, supporters say.

Bitcoin as a so-called uncorrelated asset, one not directly linked to price swings in, say, gold, bonds, or the Dow Jones Industrial Average DJIA, 0.15% or S&P 500 index SPX, 0.41%, has led to some buying of bitcoin as a financial hedge.

“Derivatives have taken a robust role in these markets, aiding the product variety available for active traders to advance their understanding of market dynamics and core risk management,” Catherine Coley, CEO of Binance U.S., one of the world’s largest crypto exchanges, told MarketWatch in an emailed exchange.

The rise of stablecoins

Another factor tied to familiarity is the emergence of stablecoins, or those cryptocurrencies that are usually pegged to a fiat currency, like the dollar DXY, -0.01% or the euro EURUSD, 0.19%. These coins don’t have nearly the volatility that is associated with a generic cryptocurrency because of their peg to a traditional currency that often underpins it.

Stablecoins have become a major source of liquidity in cryptocurrency markets, experts say.

Such coins backed by governments or corporate groups also have conferred the air of legitimacy of the digital-currency sector, with the Federal Reserve exploring the possibility of issuing its own digital currency, amid reports that China is moving forward with a digital yuan. The second-largest economy in the world launched a trial of a digital currency last month, according to reports.

The U.K. is also pushing the idea of a stablecoin for its central bank, according to a statement from Chancellor of the Exchequer Rishi Sunak.

Among major institutions, JPMorgan Chase & Co. JPM, -0.10% launched an interbank payment systems using their own blockchain-based technologies to create a dollar-pegged digital asset called JPM coin.

Fall of the buck and gold rivalry

Worries that governments are printing heaps of money to paper over problems created partly by the 2008 financial crisis was at least part of the reason that bitcoins were created over a decade ago. That thinking is also the basis for this resurgence in bitcoin, crypto experts said, as the COVID-19 pandemic forces governments and central banks to spend to limit the economic hit.

The dollar is down 4.2% so far in 2020, as measured by the ICE U.S. Dollar Index DXY, -0.01%, a gauge of the buck against a half-dozen currencies, including the euro. That puts the dollar on pace for its worst annual drop since 2017, when bitcoins were on the ascent.

“Bitcoin as a form of digital gold is also seeing its time in the sun as we see the floodgates open on monetary policy. Closing the sluice gate is more difficult than opening it,” Charles Hayter, founder and CEO of CryptoCompare, a company engaged in bitcoin data and analytics, told MarketWatch.

Anthony Denier, CEO of Webull, a crypto-trading platform said that low interest rates also have diminished the cost of owning bitcoins over dollars or bonds.

In an email exchange, Denier said “you have an extremely low interest rate environment which takes makes fiat cash stockpiles obsolete.”

Mainstream appeal…and more

PayPal PYPL, 0.32% recently said that users on its platform will be able to purchase bitcoin, as well as other sister cryptos like ethereum, Bitcoin Cash and Litecoin. PayPal’s decision last month was a further recognition of the legitimacy of digital currencies, crypto enthusiasts say.

“Today bitcoin has gotten to a place where institutional investors, banks, and family offices are legitimately pondering involvement as a defense against currency devaluation,” wrote Alex Mashinsky, CEO of Celsius Network, in emailed commentary.

“This isn’t a gold rush anymore, it’s a good investment,” he said. He predicts that bitcoin will hit $30,000 by the end of next year.

2017 vs 2020?

Some bulls make the case that this rally in bitcoin is different than the one three years ago that resulted in a massive and painful head-fake upward and crash lower for enthusiasts.

As the chart below shows, bitcoin’s price is…

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