The Bank of England in December warned individuals against bitcoin, saying it could crash. Although the price of the most popular crypto remains volatile, bitcoin also has many characteristics that protect it.
A bitcoin at or near zero? This is the risk against which the Bank of England wanted to warn individuals who plan to invest in bitcoin, in December, arguing that the value of the latter could literally collapse. However, since the beginning of 2020, the value of bitcoin has increased significantly overall: it went from 6,000 euros in January 2020 to almost 58,000 euros in November 2021. Even if its price has since fallen (38,000 euros this January 13), it is still very much above its 2020 range.
While some predict an untimely death for bitcoin, like John Paulson who does not recommend anyone to invest in crypto-currencies, others, like Catherine Wood, founder and managing director of ARK Investment Management, estimate bitcoin could hit $500,000. Kiana Danial, founder of Invest Diva expects to ” short-term volatility and long-term growth about bitcoin.
Given the contradictory opinions that one can read on the subject, it is often difficult to forge one’s own. Can the value of the world’s 1st cryptocurrency still collapse to zero? Or will it continue to appreciate in the years to come?
No one knows for sure of course, but there are some things that shed some light on what’s going on here, and what factors could be affecting bitcoin’s value.
Understanding bitcoin before attempting to price its price
Before wondering if bitcoin will ever reach the $500,000 threshold or fall back to zero, let’s try to understand what gives the queen of cryptocurrencies its current price. Typically, the value of a speculative asset is governed by many factors — supply and demand, scarcity, usefulness, public confidence in it, the project associated with the asset, and so on.
According to bitcoin advocates, bitcoin validates a large number of factors justifying its current market price:
- It is rare, since only 21 million units will be put into circulation. This rarity is one of the elements most frequently put forward by the community to justify the value of a bitcoin.
- It is useful : thanks to the development of the Lightning Network, a network allowing fast and almost cost-free transactions, bitcoin could be used as a means of payment, especially in unbanked areas of the world. El Salvador, under the impetus of its pro-bitcoin president Nayib Bukele, has also made it its legal currency (alongside the dollar)
- It becomes mainstrean : Lydia, the French fintech specializing in mobile payment, recently announced the integration of crypto-currencies into its application, offering the possibility to 5.5 million users to invest in bitcoin. In the United States, more than one in six Americans has already invested in bitcoin.
Today, the total capitalization of bitcoin represents approximately 700 billion euros, exceeding those of banking institutions such as JP Morgan or Bank of America. Bitcoin was also listed on the New York Stock Exchange in the form of a Bitcoin ETF, approved by the SEC (the US federal financial market regulator and supervisor) on October 20.
It therefore seems difficult to conceive Bitcoin from scratch, as the 1st crypto-currency has developed in recent years. Like any asset, bitcoin also has certain limitations and some of its aspects are facing criticism, which could impact its evolution.
What could drive bitcoin down?
Whether we are talking about shares on the stock market, commodities, currencies or real estate, predicting the evolution of a course is never an exact science. By definition, these assumptions are based on the future (and therefore hypothetical) economic condition of the asset. However, this future economic state depends on a large number of variables that are difficult to predict. Like any speculative asset trading in a market economy, the possibility of a zero bitcoin cannot therefore be completely ruled out. It should be noted, however, that in 2021, the course of the Turkish lira, an unstable state currency, was more volatile than that of bitcoin.
So what are the variables that would be most likely to impact the price of bitcoin in the future? The rise of bitcoin in 2021 has come with a lot of criticism towards it. Ecological disaster, currency used by criminals, or “speculative bubble” are the arguments that come up most often.
From an ecological point of view, bitcoin is accused of consuming a huge amount of electricity. This is linked to its operation: to validate transactions and mine bitcoins, myriads of computers must solve complex equations (and the more the number of machines increases, the more the difficulty of the calculations to operate rises). Defenders of bitcoin, however, argue that the bitcoin network is less energy intensive than the banking sector and that mining can be an excellent way to make money and therefore promote the development of renewable energy production sites (these being intermittent by nature, they frequently produce more than what the population needs, but mining machines can be installed anywhere).
The competition in crypto
Could competition from other cryptocurrencies drive down the price of bitcoin? This risk is quite moderate. We sometimes talk about the possibility that a reversal (“flipping”) takes place between bitcoin and ether, respectively n°1 and n°2. However, this possibility remains highly contested within the crypto community. By providing different technical options than bitcoin, competition indeed helps to solidify the overall crypto environment, which also benefits bitcoin.
The other, less often cited, issue that bitcoin will have to face in the years to come is regulation. Indeed, the policeman of the American Stock Exchange, the SEC, led by former banker Gary Gensler, has been working for months now on the establishment of a regulatory and tax framework for bitcoin and all crypto-assets.
If the prospect of reinforced regulation may seem worrying at first sight, the president of the SEC however assures that it will be beneficial in the long term to the 1st of crypto-currencies. The first regulatory measures should nevertheless increase the volatility of bitcoin in the short term, injecting a wind of uncertainty into the cryptocurrency market. This scenario has already taken place several times in the history of bitcoin: recently, fears of FED regulation combined with declarations by China to ban bitcoin had impacted its price downwards. Better regulation could, however, in the long term help to control certain drifts in the crypto market and encourage more institutions to go into crypto. It could therefore actually benefit bitcoin in the long term.