The value of the cryptocurrency market topped a record $1 trillion on 6 January, according to CoinGecko’s index of 6,124 assets. The eye-watering rise was largely driven by a spectacular rally last week by the biggest digital currency by market cap to date, Bitcoin, which breached the $40,000 mark to peak at $40,324.01 on 7 January. After a subsequent 20% plunge on Sunday and Monday, the digital currency shortly recovered, and rose on Tuesday, 12 January, to about $36,000.
The cryptocurrency has now risen more than 13% in a week, 92% in a month, and roughly 340% in a year, after central banks flooded markets with money during the coronavirus healthcare and related economic crisis.
Bitcoin's current position on the market is that of a genuine risk asset, used by retail and institutional investors alike, for “hedging their exposure to paper money”, opines Victor Golovtchenko, a global macro analyst at ThinkMarkets. He believes that the current rally is largely driven by a great deal of institutional money flows that started pouring into Bitcoin in mid-2020, at the height of the first wave of the pandemic, amid fears of accelerated money-printing, and hence, inflation.
A very similar vision of the factors behind Bitcoin's record market cap is expressed by Sven Wagenknecht, editor-in-chief and co-founder of BTC-ECHO, the biggest German-speaking online magazine for blockchain and cryptocurrencies.
“Bitcoin is now also absolutely recognised by many institutional investors such as hedge funds or asset management companies”, says Wagenknecht.
Both experts predict highly volatile times for the flagship cryptocurrency, with Wagenknecht assuming that, in the long run, large investors will bring stability to the market, with the trend to this already visible, so that “the fluctuation margin will decrease again in the future as market capitalisation increases”.
Despite the trend of Bitcoin winning more and more favour and trust among investors, a big question arises of “whether governments across the world are going to be tolerant towards bitcoin's rise”, says Golovtchenko.
“What I mean by that is that some countries can always ban the ownership of Bitcoin, banks can ban transactions from exchanges to bank accounts”, the expert explains, offering an example from the Great Depression period, when owners of gold, another popular economic safe haven, were all of a sudden deprived of their caches.
“In the beginning of the 1930s, owning physical gold was suddenly banned by governments because they realised that [was] the only way to get out of this debt trap”, the analyst notes.
Amid the latest price corrections, the debate has moved to center around the possibility – if any – of a “bubble” and its chances to burst, provided there is one. Irrespective of whether it happens or not, it is governments and regulatory agencies that are primarily in power to limit the exponential rise in Bitcoin’s market cap, Golovtchenko says.