Khurram Shroff is the chairman of UAE-based private equity firm IBC Group which has invested in over 4000 different Blockchain products. Shroff has been an ardent champion of Blockchain and was also instrumental in the recent launch of Ethereum 2.0, through an investment of $10 million (around 20,000 Ether stakes).
At the time of writing this article, the value of one Bitcoin is at an all-time high of over $47,000. Given the current dynamism in the crypto market it’s hard to believe the value was only $5,000 in March, 2020. While the upturn is attributed to multiple factors, many are wondering if this is a protracted bull run [when extended period when stock prices or market valuations are high] or a short-lived market phenomenon. Such scepticism may stem from Bitcoin's fall in valuation in 2018, which followed a year of significant gains. Does this mean the current high valuation carries a relapse risk?
Like stocks and many other assets, cryptocurrencies, too, are not without market risks. But the current bull run is quite different to the one in 2017. Driven by compelling market forces, and institutional interest in mainstream crypto adoption, the current escalation in valuation is unlike previous ones. Post the Covid-19 outbreak, cryptocurrencies—with limited units by default—are being used as hedge instruments against the debasement of fiat currencies. That aside, simple supply-demand dynamics are also making a case for Bitcoin to remain bullish throughout 2021.
Fixed supply, high demand
The last Bitcoin halving event, which reduces the reward per block by 50 per cent every four years to control inflation, was in May 2020. With the supply of Bitcoin limited to 21 million—a protocol that is expected to remain unchanged for the foreseeable future—we can expect a steady increase in demand. And considering the majority of "Whales" (large companies or individuals with enough Bitcoins to influence its price) are unlikely to dump their holdings, the supply of Bitcoin will remain rather limited.
In fact, it was the halving event in 2016, which paved the way for Bitcoin's bull run in 2017. A similar surge is expected in 2021. However, unlike the previous event, which was followed by a relapse, sustained demand from institutional investors and hedge funds could help maintain buoyancy in crypto markets this year.
Shaking the pandemic blues
The aftermath of the Covid-19 outbreak has dented the economic outlook of virtually all nations. In response, many governments are increasing money supply, which in turn is debasing the traditional fiat currencies and triggering waves of inflation. The US Federal Reserve alone has added $3 trillion in currency to the market, with an additional $2 trillion in consideration. In the UK, the Bank of England is also expected to inject £1 trillion into the economy. Such bailouts will keep adding inflationary pressures and debts will continue to mount. Bond-yield manipulations and low borrowing rates cannot offset the burden.
Under the circumstances, investors often turn to gold to store value. However, cryptocurrencies are providing the same opportunities, with added benefits. Given renewed mobility restrictions and lockdowns in some nations, the ease with which digital currencies can be traded online is another positive, especially with Blockchain offering transparency and immutable records.
In 2017, retail constituted the primary demand side for cryptocurrencies. This year, along with increased retail interest and digital tokenisation, crypto-linked assets could cater to old-school investors and leading consortiums. Digital payments giant Paypal is now allowing Bitcoin and crypto transactions on its platform. Billionaire investors, like Stan Druckenmiller and Paul Tudor Jones, buying into the crypto wave, and S&P Dow Jones debuting crypto indices, are fuelling the fire further. But Bitcoin's latest tailwind was when Elon Musk — currently the richest person in the world—invested $1.5 billion in Bitcoin through his electric car company Tesla, which is also exploring cryptocurrencies as a payment option for car sales.
In December 2020, a leaked Citi report revealed one of the bank analyst’s take on Bitcoin's prospects in the near term, projecting Bitcoin to reach a valuation of $318,000 by the end of the year, calling it the "21st century gold". This begs the question: Is such valuation possible? Yes, according to Tyler Winklevoss, a celebrated American cryptocurrency and Bitcoin investor.
Disrupting gold; reaching half a million mark
According to Winklevoss, in time, Bitcoin could be the most viable replacement for bullion. Bitcoin - or any other cryptocurrency for that matter - mirrors the characteristics of gold: Portable, scarce and divisible, among other things. But Bitcoin offers more — it is not only scarce, but also fixed in volume. Unlike gold, cryptocurrencies have the potential to be both reliable stores of value and easy mediums of exchange, thanks to their virtuality.
If the predictions of Winklevoss and the anonymous Citi analyst were to come true, and if Bitcoin is truly poised to disrupt gold bullion, it should match the $9 trillion valuation of the entire gold supply. This is to say, each Bitcoin’s value could increase 16 fold, to reach $500,000.
In 2020 alone, Bitcoin valuation increased by 300 per cent and optimists like Winklevoss predict a similar bull run for Ethereum, the second-largest crypto by market capitalisation, as well. At the time of writing, the value of one Ether is hovering well over $1,800 and many hedge funds are investing in Ether, alongside Bitcoin. Grayscale, one of the largest hedge funds in the US, holds over 2.6 per cent of circulating Bitcoin supply and 2 per cent of circulating Ether supply. If history is any indication, commodities and currencies backed by institutions from the US often serve as early indicators of how global capital will be deployed in the near future. In a world looking for impetus to drive an economic rejuvenation, the crypto bull run is a strong contender for this role, and one can expect this trend to continue, and in fact even escalate, in 2021.