Is bitcoin’s 2020 rally another flash in the pan?

LONDON (Reuters) – Crypto analysts disagree on whether Bitcoin's rise this year is due to unique factors or just recent volatility. However, many agree on one factor: an upcoming cut in Bitcoin supply.

FILE PHOTO: This image from January 27, 2020 shows representations of Bitcoin and US dollar banknotes in virtual currency. REUTERS / Dado Ruvic // File Photo

Bitcoin has risen almost half this year to over $ 10,000 (£ 7,675.2) for the first time since October. It reached its highest level in five months on Tuesday.

The 11-year history of cryptocurrency is full of rapid rises and drops. At the end of 2017, it rose three and a half times to just under $ 20,000 in just 35 days. It then dropped by 70% in seven weeks.

Such wild and often inexplicable fluctuations are the reason why Bitcoin is facing the struggle to become a working currency.

This time, some market players point to a confluence of drivers that have never been seen before. Arcane technology factors, expectations of mainstream acceptance, and macroeconomic trends are causing markets to re-examine the value of Bitcoin.

"You can argue that a new valuation is taking place," said Russ Mold, investment director at AJ Bell, a stockbroker who oversees $ 71 billion in assets.

Basically, many are leading the growing demand for bitcoin before its recent "halving" – a 50% reduction in cryptocurrency production due in May and one of the few observable events that are known to have a significant impact on price ,

A rule written in Bitcoin's underlying code reduces the number of new coins awarded to the miners behind the global Bitcoin supply.

In the year after the two previous halving, November 2012 and July 2016, Bitcoin rose 80-fold and 4-fold, respectively. The exact proportion of the profits caused by the halving is unclear.

"It's a rarely seen factor. In any case, if you look at past events, the value of Bitcoin has increased significantly and noticeably," said Windsor Holden, a payment advisor who tracks crypto and blockchain.

GRAPHICS – Bitcoin halved: Here

"HYPE CYCLE"

Others, however, doubt that Bitcoin's recent rally will be underpinned by anything more substantial than the previous booms.

"The recent rally was fueled by the usual hype cycle that we've seen very reliably every two to three years," said Michel Rauchs, author of several Cambridge University studies on cryptocurrencies and blockchain technology.

"We have these mini bubbles and the momentum they generate – first Bitcoin, then these other coins. It is a self-fulfilling prophecy. "

Major cryptocurrencies that tend to correlate with Bitcoin have also risen this year. The Ethereum has more than doubled; Ripple's XRP token has increased by over 75%.

Other factors cited for the rally, such as increased demand for assets that don't correlate with mainstream markets after the United States killed an Iranian military commander last month, are also questionable.

Bitcoin's security feature is unclear. It has dropped regularly in recent years in times of geopolitical stress.

A looser central bank policy is also given as a reason to bet on riskier assets. But this connection is also difficult to prove. Bitcoin fell in earlier phases of simple money.

DIGITAL DOLLAR?

There are also widespread expectations that cryptocurrencies will become mainstream as central banks step up their research into digital currencies after Facebook tried to offer its Libra coin. Some, like China, are approaching the issue of their own coins.

And in comments that traders said they fueled Bitcoin purchases, Fed chairman Jerome Powell told Tuesday's lawmakers that the Fed was "working hard" on the issue as it worked didn't choose a digital dollar.

The interest of central banks is also problematic as a reason for the rise in Bitcoin, said Rauchs.

"People tend to confuse and merge these different concepts, which are fundamentally different," he said. "This creates a bubble in which you bring everything together and appreciate everything."

In the short term, according to the crypto traders surveyed by Reuters, the cut in Bitcoin supply is likely to be greatest for investors.

"Things are matching," said Jamie Farquhar, portfolio manager at crypto company NKB Group. "But the real thing that people are looking at is halving."

Reporting by Tom Wilson, editor of Larry King

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