Bitcoin remains in price discovery zone despite volatility

Pricing risks will continue to remain on the upside after institutional investors endorse the value of cryptocurrencies

Institutional investors have identified value in Bitcoin as a hedge against inflation and a store of value, and have poured billions of dollars into that conviction. Photo: Reuters

Even those who thought that 2020 was an interesting year for digital assets would have been surprised by the volatility of January 2021.

Over the course of the month, Bitcoin rose to a new all-time high of $41,942 on January 8, before falling to $33,758 at the time of writing. Other digital assets saw similar performances, with Ethereum seeing a new all-time high of $1,467 on January 2, before similarly falling to its current levels of $1,347.

Such volatility has become a regular feature in digital asset markets and continues to fuel criticism of speculation and risk. The criticism may very well be unwarranted, as analysis of the bigger picture shows it is more likely that the market remains in price discovery mode for the moment.

Let us look at Bitcoin’s rise in value over the course of 2020. While detractors may argue that it was fuelled by speculation, this is far from the truth and, indeed, the surge in price was built on a strong foundation. Amid increasingly clear regulation, we witnessed many institutional investors (the smart money) buying heaps of the cryptocurrency amid attempts to capitalise on increasing popularity and as a means of diversification.

Whether as a hedge against inflation or a store of value, the real underlying fact is that institutional investors have identified value in Bitcoin and have poured billions of dollars into that conviction. Indeed, from the bounces in the market at the current levels as well as the transactions that can be identified from blockchain ledgers, there is evidence to suggest that these institutional players are purchasing more Bitcoins on the dips.

Now let us return to the price discovery scenario that the market finds itself in. At the time of writing, Bitcoin has a market capitalisation of almost $668 billion, putting the total value of Bitcoin in circulation at $200bn more than JPMorgan and Goldman Sachs Group combined.

This comes at a time when adoption is still relatively in its infancy, with various polls showing single digit percentages of the global population owning Bitcoin and other digital assets. With the total supply capped at 21 million Bitcoins, the scarcity of the cryptocurrency is already evident and will become even more so as increasing amounts of the money supply are invested in the asset.

Where such a development will take the price over the next few years is the subject of wild debate, but one thing proponents have in common is that they believe that pricing risks remain on the upside. With institutions now actively diversifying in the digital asset and hailing it as a store of value and an inflation hedge, it brings up a very key question. How soon will it be until average savers, investors and pension holders have digital assets as part of their portfolio?

Over 2020, the developments in this regard have been critical towards lowering the barriers of entry to cryptocurrency ownership. We have seen this on the regulatory side, where clear guidelines have been created on ownership and consumer protection laws. We have seen this from companies like PayPal, among the world’s most popular online payment gateways, which now has given its more than 300 million retail and business users the ability to conveniently purchase cryptocurrencies.

In short, first time ownership of cryptocurrencies has never been easier and as these hurdles continue to be lowered, it can be expected that more people will get involved.

Lastly, and perhaps most importantly, regulated exchanges have become more accessible to institutional buyers. One need look no further than Kraken, one of the world’s leading regulated digital exchanges. Having acquired a US banking licence last year, it is showing no hint of slowing down and is currently looking to open in the UAE, adding to the already thriving blockchain and FinTech ecosystem hub that has been created.

But what is the significance of this? To leave you with a closing thought, consider the following. We have already witnessed that institutions are willing to add Bitcoin to diversify their holdings and protect wealth. With safer and regulated ways for them to buy Bitcoin, we can expect the reluctance to fade and for more funds to get off the fence. What this will do to the value of such assets is anyone’s guess, but one thing is clear – it will help conclude the current story of price discovery.

Mohammed Altajir is the founder and project custodian of Tratok Portal