The cryptocurrency craze that gripped investors for much of 2020 took a 180-degree turn in April. Since then, the value of Bitcoin (quotation BTC) plunged about 53% before rebounding 28% in the past two weeks.
The coin is now close to $ 38.000 levels after its short-term risk factors have somewhat dissipated. So can investors once again rely on the iconic cryptocurrency to bring their account balance to the moon?
Blessings from the triumvirate
Shortly after the sell-off, Twitter CEO Jack Dorsey, ARK Invest CEO Cathie Wood, and Tesla CEO Elon Musk all approved the cryptocurrency. In a recent earnings call, Dorsey said Bitcoin would be an "important part of the company's future." Meanwhile, Musk plans to resume accepting Bitcoin payments for Tesla's new purchases, citing the increase in renewable energy in mining the digital currency while balancing environmental concerns.
But the biggest catalyst of the three is Wood's plan to prepare the first Bitcoin ETF fund, which would be traded under the symbol "ARKB" if approved by regulatory agencies. Like all networks, Bitcoin derives its intrinsic value based on the number of users. As more users flock to the network, they bring in more capital, which drives up the price of each coin as supply is limited. An ETF does just that as it allows multiple investors to become “Bitcoiner” without worrying about exchange hacks or paying ridiculous account fees to buy the asset.
Bitcoin has always been popular with the Chinese elite, as it provides a method to steal capital overseas in lieu of strict central government policies that prohibit it. Recent provincial crackdowns on cryptocurrency mining and a ban on financial institutions from dealing with cryptocurrency investors have caused the spread of fears, uncertainties and doubts. However, that's not the end of the game.
The ruling Chinese Communist Party has stopped banning the ownership of cryptocurrencies. So Chinese billionaires and entrepreneurs alike could easily use offshore accounts, offshore exchanges and "puppet" entities to buy Bitcoin and transfer their hard-earned money overseas, bypassing recent regulations. Remember that capital inflows into Bitcoin would inevitably cause its price to rise because the supply is fixed, so the coin may continue its rally for some time. Keep in mind that there are only around 74,5 million Bitcoin wallet users out there, so its adoption is far from fully saturated.
But the long-term outlook remains uncertain
The Bitcoin network is full of catalysts and inhibitors. On the one hand, increasing user adoption, increased demand from retail investors, more vendors accepting Bitcoin and countries adopting it as legal tender (such as El Salvador) would increase its value. On the other hand, issues such as government crackdowns and environmental sustainability pose significant risks to its lunar mission.
By the way, Bitcoin's mining difficulty increases exponentially over time, so miners have to buy better GPUs that consume more electricity. Right now, it takes 1.544 kWh of electricity to process a single Bitcoin transaction, which is roughly the same amount of energy that an average American household consumes in 53 days. At this rate, I expect Bitcoin's energy use to surpass that of global energy production by the end of the century.
Overall, Bitcoin fell too fast to warrant a rebound in short-term trading. However, the long-term risks are just emerging. I would advise investors to wait for the bubble to deflate further downward before considering opening a share.