Bitcoin has entered 2021 on a high as its value surpassed $34,000 (£25,000), a new record for the cryptocurrency.
Since peaking on January 3, it has experienced a flash crash as its value fell to $29,000 (£22,000). This $5,000 loss in a matter of hours marks the biggest fall in Bitcoin’s value in its 12-year history. The price of Bitcoin has since rallied to around $31,000 (£23,000)
The new record caps a significant year for Bitcoin as its value quadrupled over the course of 2020.
The cryptocurrency was trading above $20,000 around three weeks previously, breaking its previous record of over $18,600 set in December 2017.
Bitcoin entered 2020 worth around $8,000, before dropping off to around $5,500 in March. In October, it was still worth just under $11,000, meaning it has tripled in value in about three months. This new rise is greater in gross terms that its original late-2017 surge.
The new valuation happened on the 12th anniversary of the creation of the Bitcoin network.
Bitcoin has outperformed traditional safe havens, such as gold, which has also risen in value over 2020.
The cryptocurrency’s new record valuation was driven, in part, by the fallout of the Covid-19 pandemic. For most, 2020 was a turbulent year, with Bitcoin one of the few success stories of the year.
With the dollar falling in value to its lowest point since spring 2018 and signs of economic recessions around the world, along with concerns about unemployment and uncertainties over how long the pandemic will last, investors have been looking for new ways to protect and grow their money.
The rise has been pinned on institutional investors using Bitcoin as an alternative hedge investment. Groups like UK investment management firm Ruffer, which invested £456 million in bitcoins (after making profit on gold), are investing more money in Bitcoin than the individual investors that drove its previous valuation.
In addition, dedicated cryptocurrency investment firms, such as Edinburgh-based Zumo, have started to enter the financial ecosystem, helping bring more investors place their money in cryptocurrencies.
There have also been recent moves that have helped move Bitcoin into mainstream finance. Paypal announced in October last year that its users would be able to trade cryptocurrencies on its platform. The service is expected to be offered on Venmo this year as well.
By opening cryptocurrency trading to Paypal’s roughly 346 million users, this opens up a significant new base of potential Bitcoin users.
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Bitcoin’s previous rise in 2017 was followed by a massive falloff in value. Despite this, its value failed to dissipate altogether and in recent years the cryptocurrency proved surprisingly resilient.
If Bitcoin’s rise is tied to the calamities of 2020, then what does 2021 mean for the cryptocurrency?
The new year has brought optimism over the hopes of a coronavirus vaccine and a return to economic growth. However, the main driver of Bitcoin’s value in the immediate future will be the number of people looking for a short-term return on investment.
One of the major limitations on Bitcoin’s future is that there is a limit coded into the technology. A total of 21 million bitcoins can be mined in total, with 18.5 million in circulation. However, the number of bitcoins introduced halves every four years, with around 900 coming into circulation each year. As such, the final bitcoin will not be mined until around 2140, assuming the protocols are not changed.
The long-term value of Bitcoin is yet to be seen – its last surge in value was followed by a major drop off, which is likely to be repeated sooner rather than later. However, its rally and new record shown the cryptocurrency’s resilience. While its value is likely to fluctuate, Bitcoin’s future may prove more stable.