2021-04-08 16:25:03

UAE: Has Bitcoin lost its shine or will rival cryptocurrency Ether soar past it next?

Bitcoin
Image Credit: Reuters

Dubai: After unprecedented demand drove the price of Bitcoin to unattainable levels in the past many months, the widely-watched digital currency has been consistently slipping over the last few weeks.

Bitcoin has been moving downwards since reaching an all-time high of $61,884 (Dh227,312) on March 13. The price of Bitcoin decreased considerably on April 7 but bounced up once it reached the $55,500 (Dh 203,862).

Although Bitcoin is still expected to break out from the current trading pattern and attempt to move above the $59,500 (Dh218,555) level in the short-term, there is also increasing market talk on how demand is seen piling onto rival cryptocurrencies like Ether.

Rise of other cryptocurrencies

The dramatic rise in Bitcoin value has put cryptocurrency on the map in the investment space. Since its inception – not over a decade ago, Bitcoin has surpassed great heights in terms of value.

While Bitcoin is the largest cryptocurrency, with a $1 trillion (Dh3.67 trillion) market cap, there are now over 5000-plus cryptocurrencies currently in circulation. Several digital currencies have posted flashier returns than Bitcoin.

Ethereum – the second-largest cryptocurrency, has risen by 750 per cent since 2020, besting Bitcoin’s 600 per cent returns during the same period. Many such cryptocurrencies are now sharing the spotlight alongside Bitcoin (BTC), like Litecoin (LTC), Ripple (XRP), Cardano (ADA) and Polkadot (DOT).

Has Bitcoin replaced gold?

While gold suffered its worst first quarter in 39 years, Bitcoin enjoyed its sixth consecutive month of double-digit growth – its longest monthly upward streak since 2013.

Both gold and Bitcoin are generally considered inflation hedges, but finance institutions or hedge funds may now be regarding Bitcoin as a better store of value, a number of matter experts and veteran investors currently evaluate.

“In the past, market participants were reluctant to own Bitcoin over gold because few understood its asymmetric upside and its utility as a superior store of value,” said Pete Humiston, head of intelligence at US-based cryptocurrency exchange Kraken.

“While neither offer yield, Bitcoin’s total addressable market extends far beyond gold’s $11 trillion (Dh 40.40 trillion) market cap, giving it greater utility in today’s day and age where virtually every aspect of our lives is shifting from analogue to digital.”

Bitcoin
Bitcoin suddenly springs to life
Image Credit: Screengrab

Story of rise, fall and rise again

On March 11, 2020, Bitcoin was valued at around $8,000 (Dh29,384). By the end of December, it had risen nearly four times to touch $29,000 (Dh106,519). And by mid-March 2021, it had further doubled to $60,000 (Dh220,386) levels.

If Bitcoin’s volatility was a concern, the world’s largest cryptocurrency has now become more stable. Bitcoin’s volatility fell nearly 40 per cent month-on-month to a three-month low with a knock-on effect on trading volumes, which fell five per cent to a year-to-date low of about $255 billion (Dh936 billion).

Ether, the cryptocurrency of the Ethereum network, outperformed Bitcoin with a 35 per cent return in March, compared to Bitcoin’s 30 per cent return. Like Bitcoin, Ether’s market volatility and trading volumes both fell to year-to-date lows.

Historically, second quarter is positive for the crypto market with Bitcoin’s median quarterly returns at 39.5 per cent and Ether’s at 71 per cent. Should history repeat itself, Bitcoin could finish June at $82,000 (Dh301,194) and Ether at well above $3,000 (Dh110,19).

What type of investors drive up the price?

Some investors use Bitcoin to mitigate risk, as the price of most bonds now has become artificially high, making them less attractive for investors looking to mitigate risk and diversify their portfolios.

Usually, investors will turn to gold but since the metal is also experiencing difficulties, investors are turning to bitcoin despite its volatility, economists note.

Other investors comprise of speculators and those who truly believe that there will be a debasement of currencies. Most investors are assuming that crypto assets will grow in popularity in the private sector and governments will not interfere.

Scarcity will keep Bitcoin’s price up

One pull factor for Bitcoin will still be its scarcity. Every 10 minutes, you have 6.25 Bitcoins that are created. There’s about 700 bitcoin created each day.

This is going to continue until the year 2140 where you’ll hit the maximum 21 million Bitcoins. And one of the mechanisms is that every four years, the number of Bitcoin that are offered to miners every 10 minutes, is cut by half – a process known as Bitcoin halving.

Despite its scarcity and skyward trajectory, there are still plenty of risks when it comes to investing in Bitcoin. One feature of Bitcoin is its price fluctuation, and this is something new investors might not be used to.

Unless you want to actively trade in it, if you just want to buy it to own some, buy it and just don’t look at the price. Some advise buy-and-hold investors to monitor it only every few months rather than checking it every hour.

Is Bitcoin a better store of value?

According to one recent study, two-thirds of millennials see bitcoin as a better store of value than gold. But unlike gold and fiat currencies, there are questions over Bitcoin’s usefulness as a store of value. And that’s another risk that investors have to keep in mind.

What are fiat currencies?

Fiat money may be used to make digital or physical payments or transfers of funds. Only a digital transfer of funds is possible with cryptocurrency. Fiat currencies have a tangible appearance in the form of coins and notes. The supply of cryptocurrencies is limited.

Experts say that more price volatility can be expected for Bitcoin. Some estimates that Bitcoin could range between $50,000 (Dh183,655) and $100,000 (Dh367,310) by the end of the year, while others say the price could drop.

However, the consensus among experts is that if you choose to invest or not, you should be comfortable with the risk that if it goes to zero, it’s not going to devastate you financially. If you want to invest in cryptocurrencies, make sure you size your investment appropriately.

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