Bitcoin is the in the midst of a bull run which has seen it shatter its previous all-time high of December 2017. The cryptocurrency broke through the $20,000 barrier at the end of November and continued to rise through December and into the New Year, eventually hitting a peak of $41,500 on 8th January.

A reminder of the inherent volatility of cryptocurrency was ready to pounce, however. Bitcoin promptly lost around 25% of its value, tumbling to £30,500 on January 11th before finding some support and recovering to over $36,500. At the time of writing, Bitcoin is priced at around $34,000.

Crypto hawks will take solace in the currency’s healthy recovery, perhaps viewing $30,000 as Bitcoin’s new floor, which of course remains to be seen.

At any rate, questions are abound as to what is driving the crypto bull run, how far it can go and whether gains are more sustainable than they proved to be three years ago.

Supply and demand

Bitcoin’s increase in value in excess of 800% since March last year can be attributed to two broad factors. The first is the wider economic conditions of Covid, lockdowns, restrictions on business activity and unprecedented levels of central bank financial stimulus to help support companies and keep people employed.

The effects this has on currency will have seen savers and investors search for safe havens as inflationary hedges. Often described as ‘digital gold’, Bitcoin is seen by many as a natural diversification tool in investment portfolios, due to it separation from mainstream financial markets and fiat currencies.

Swiss crypto bank, SEBA, published research last March predicting that a Bitcoin bull run was on the cards owing to turbulent economic conditions, drawing comparison with significant increases in gold’s value in the aftermath of previous crises: Black Monday in 1987, the dot-com bubble bursting in 2000 and the global financial crisis of 2008.

The research describes Bitcoin, like gold, as a form of “outside money” that is not owned by any government or central bank and cannot be manipulated as such.

The second factor is Bitcoin’s latest halving, which took place on 11th May last year. This saw the reward for adding new transactions to the blockchain diminish from 12.5 bitcoins to 6.25.

Bitcoin’s previous halving in July 2016 was followed shortly after by the crypto’s historic bull run which saw its value increase from $900 to just shy of $20,000 in the space of 12 months.

Owing to conventional supply and demand, the fewer coins are being created, the more valuable each one already in existence is.

Once bitten?

However, comparisons with 2017 are likely to cause some unease for Bitcoin investors given what transpired in the following year. The crypto lost more than 70% of its value in 2018, sinking as low as $3,400 on 6th December of that year.

Commentators will see what comparisons there are to be drawn between the crypto market today compared to then to forecast how likely such a scenario is to repeat.

The holy grail for the crypto market is institutional investment. If the deep pockets of large banks and fund, asset and wealth managers flow into the space, currency will be less thinly traded which should help to ease the price volatility.

This could in turn create more use cases for crypto, with more retailers accepting it as a means of payment, creating a virtuous cycle of more consumers purchasing coins, drawing more institutions to offer trading, brokerage or custody services, in turn increasing the demand and necessity for regulatory frameworks, thereby driving investment further.

At present, it appears institutional investment remains rather nascent.

According to Jeff Currie, Goldman Sachs’ global head of commodities research, only 1% of the $700 billion currently invested in bitcoin is institutional money.

Responses from banking giants regarding what plans they have, if any, for crypto brokerage, trading or custody services, remain cagey.

“While we do not accept crypto assets – in deposit, custodial or other accounts – we will continue to evaluate the underlying technology for potential transactional transparency and settlement innovations it may hold,” a Wells Fargo spokesperson tells Finextra Research.

“Wells Fargo is committed to exploring emerging technologies, but as with all emerging technologies, understanding the regulatory environment and ensuring customer privacy and security are foundational elements of this exploration.”

It seems cryptocurrency remains the Wild West of finance for such institutions, not helped by news of hundreds of millions of dollars’ worth of Bitcoin being lost in landfill or disappearing altogether because its owner cannot remember his password.

This is where large finance companies looking to gain a first-mover advantage could be vital. Bitcoin was given added legitimacy in December when PayPal and Square began allowing their users to buy and sell crypto on their platforms.

Payments behemoth Visa has also been making quiet steps into the space over the last year, offering debit cards that allow consumers to spend their crypto held on various platforms, including Coinbase and Binance.

Visa told Yahoo Finance in November that is working with some 25 digital currency companies “on a variety of bitcoin-related products and services, cards being just one area”.

Such offerings by financial services firms with the reach of Visa or PayPal may open the door to other institutions looking for a share of the market to demonstrate their credentials as companies at the forefront of innovation and disruption in the industry.

Predictions for 2021

One reason for Bitcoin investors to be optimistic is its relative maturity as an asset compared to three years ago. The dramatic decline on 11th January would have surely set alarm bells ringing, but its healthy recovery since demonstrates the increased resilience in the market.

This may suggest that those accumulating coins now are more experienced investors looking to diversify their portfolios with crypto exposure. This makes the asset less prone to widescale sell-offs in the event of a pullback, compared to the 2017 bull run which was more driven by speculation and fear of missing out (FOMO).

One crude way of assessing this is Google search data. As recently as a month ago when the crypto was eclipsing its December 2017 peak, searches for “bitcoin” were only 20% what they had been three years ago, suggesting hype and FOMO is less of a factor in this bull run.

FOMO investors are more likely to bank profits when the price hit a certain milestone and crucially more prone to panic in the case of a correction leading to a rout of the like seen in early 2018.

“Many detractors were quick to believe the bitcoin bubble had popped, as the price seemed destined to fall below $30,000 but this failed to materialise,” says Simon Peters, cryptoasset analyst at eToro.

“As a result, enthusiasts declared victory, arguing that $30,000 is a new bottom.”

Peters believes it is too early to say if this is the case but that the outlook remains positive. It is likely large-scale investors would have used the dip in price to increase their holdings taking advantage of the relatively cheaper price.

“There will be volatility, which is natural after the gains we have seen, but the long-term trend is clear. Crypto is moving into the mainstream and more and more investors are adding exposure,” he says.

“I believe, with this positive momentum, Bitcoin is well on track to hit my price target of $70,000-$90,000 by Christmas 2021.”