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Why is Bitcoin's Price Going Up Suddenly?

Editor, TRANSFIN.
Nov 28, 2020 9:04 AM 5 min read
Editorial

Bitcoin is surging again.

This may seem like incessant déjà vu, but it may be different this time.

The cryptocurrency came close to surpassing its all-time high recently after crossing $19,000 for the first time since 2017. All in all, its price has more than doubled this year.

 

 

 

Investors are buying into the hype. Not just your usual Bitcoin bros and tech wonks, but also small-scale first-time individual investors and deep-pocketed institutional ones.

And not just in the US, South Korea, Singapore or Japan - but also in India.

Yes, India, where only two months ago the word on the street was that Parliament might pass a Bill to outlaw all crypto trading and make it a criminal offense.

While there isn’t a source of official data, market estimates suggest that day-to-day crypto trading has reached nearly ₹30cr ($4m). And the country’s share of person-to-person virtual currency trading within Asia has surged to 33% - the same level as China.

If present trends continue, India’s share could very well cross China’s in the near-term.

What explains Indians’ sudden fascination with Bitcoin? And why is the cryptocurrency scaling new heights at all?

Global Cues

Bitcoin’s rally in recent weeks may be attributed to the following events and trends.

 

  1. Joe Biden’s victory in the US Presidential election

Biden is not exactly a crypto fanatic, but markets see him as being less hostile to virtual currencies than Donald Trump, who is, in his own words, “not a fan”.

Moreover, the people the incoming President has picked for his team may be more accommodating of cryptocurrencies. In his transition team, Biden has Gary Gensler, who currently teaches courses on blockchain and digital currencies.

Janet Yellen has been tapped for Treasury Secretary, and she has signalled an interest in blockchain technology. (The outgoing Treasury Secretary Steven Mnuchin, meanwhile, had branded Facebook’s digital currency Libra a “national security issue”.) 

 

  1. Less uncertainty in the US

Vote tallying delays following the election led to days of tense tarrying. Then there was Trump’s repeated claims that the election had been “rigged”.

But Biden’s victory and the beginning of his transition gave markets - both equity and crypto - a breather. It also raised hopes for another economic stimulus package and a stronger Dollar. The former would mean more money going around = more willingness by investors to pour capital into high-risk assets like Bitcoin.

 

  1. Whales and institutional buying

“Whales” have been buying large quantities of Bitcoin this year...and not selling it off. Instead, they are going long on their bullish sentiment, thereby helping drive the price up. This has formed “whale clusters”.

FYI: In investing, “whales” are capital-heavy investors (institutional or HNIs) who try to buy large quantities of a stock or asset, driving prices up in the near-term on account of the sharp uptick in demand. They could subsequently unwind the position at a later date and at a higher price. 

 

  1. Positive adoption trends

Tech companies and banking institutions around the world are slowly warming up to crypto.

PayPal announced earlier this month that it would allow users in the US to buy, hold and sell cryptocurrency. 22 Indian bank branches began offering crypto banking services. The IMF released an educational video on crypto trading - and tone was actually neutral. JPMorgan, which once called Bitcoin “a fraud”, said the currency could give competition to safe-haven assets like gold.

A change in the winds, indeed!

 

  1. COVID-19

(Don't be surprised: of course the pandemic has something to do with this.)

With more people working from home, they have more time on their hands + more disposable income now that they aren’t spending on movie tickets, restaurant outings or travel sprees. This has generated more interest towards crypto in general. Quite like the trend of Robinhood traders in stock markets.

Moreover, November has been a good month for vaccine updates. With Pfizer, Moderna and Oxford reporting high efficacy in their clinical trials, market sentiment has become more sanguine and investors are becoming less risk-averse.

 

Coming to India…

While it may be easy to understand the general global optimism about Bitcoin, India’s renewed romance with the same might seem like an anomaly.

After all, we’re talking about a country whose Central Bank has been suspicious of anything outside the realms of traditional banking: it outright banned crypto trading in 2018.

The Supreme Court (SC) overturned that ban this year. But before Bitcoin enthusiasts could breathe a sigh of relief, a Bill was introduced in Parliament to not only ban crypto, but also make such trading a criminal offense (a ten-year prison sentence as well as hefty fines of up to ₹25cr ($3.63m)).

And this was only in September. What explains the Bitcoin bullishness, then?

 

  1. Regulatory pullback

The ban-crypto Bill was omitted in the previous Parliamentary session. Thus, the space remains the unregulated and vibrant one it has grown to be since the SC verdict. This may have pacified investors’ nerves. (However, there’s no saying the Parliament won’t take up the Bill again when it meets next.)

 

  1. Flush of foreign capital

Anticipating a boom, international exchanges have been buying Indian ones via private equity investments. India’s largest crypto exchange, Wazir X, was purchased by Binance. Unocoin recently announced that it raised $5m from Draper Associates. Global exchange Coinswitch launched its India business in June 2020.

 

  1. Remittances

Increasingly, NRIs are sending money to India in a tokenised form to avoid hefty bank charges. Families in India are also using the same channel to send money to students overseas. Having the world’s largest diaspora with more than $100bn in annual two-way money flow doesn’t hurt here.

 

  1. Indirect influence of macro events

One of these is 2016’s demonetisation, which shattered a long-held confidence in fiat currency. In effect, digital payments have become wildly popular and trusted, and this might have translated into curiosity about crypto.

Additionally, the many recent bank failures may have dented investors’ confidence in traditional banking. Just consider the mayhem that has plagued Indian banking in the last two years - NBFC failures like IL&FS and DHFL, private bank failures like Yes Bank and Lakshmi Vilas Bank, and cooperative bank failures like PMC.

 

  1. The Robinhood trader angle

The pandemic motivated working-from-home professionals to learn stock trading; it would have done the same for professionals in India. (FYI: Most Bitcoin traders in India are in the 20-40 age group.)

 

Is This Another Bitcoin Bubble?

To be fair, we’ve been here before. Bitcoin climbs energetically and widens investors’ eyes...only to crash and burn a few weeks later and succumb to doldrums. Usually, this is due to regulatory scrutiny or speculative buying.

Will Bitcoin sustain its trajectory this time around? Maybe it will: the whales look like they’re here to stay, regulators might be less hostile, and new investors are entering the crypto market in droves.

But on the other hand, this may just be another Bitcoin bubble. Whales can sell short at any point in time, emerging markets like India may still outlaw crypto trading, and Robinhood-like Bitcoin bros may lose interest post-pandemic.

All we can do is wait and watch. Don’t count your Bitcoins before they hatch!

FIN.

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