Bitcoin continued its blistering start to 2021, crossing $40,000 for the first time on Thursday.
The price traded as high as $40,324, according to CoinDesk, up 14% on the day and as much as 38% on a year that is only seven days old. The digital currency didn’t hold the $40,000 level for long, though. It settled at $39,595.92, up 10%.
Bitcoin’s rally has been turbocharged in recent days—it crossed $30,000 for the first time on Saturday, then powered through $36,000 and $37,000 on Wednesday, before setting three new $1,000 milestones on Thursday.
“Rallies like this that are driven by FOMO [fear of missing out] alone, with loose logic applied later, aren’t sustainable,” said Oanda analyst
“But they can certainly produce extraordinary returns in the meantime.”
Bitcoin’s price has been rising for months in conjunction with stocks, emerging markets and commodity prices as investors have flocked to riskier assets in response to the aggressive monetary policies enacted by central banks to combat the economic collapse caused by the coronavirus pandemic.
As an asset that is considerably more speculative than stocks, junk bonds or even gold, bitcoin has greatly benefited from that environment. Since its March 2020 low of $3,867 through Thursday’s high, bitcoin was up as much as 943%.
Even more stunning, bitcoin’s price has doubled in less than a month. Bitcoin first hit the $20,000 level on Dec. 16. That was a new high that came after a nearly three-year period in which bitcoin languished after its 2017 rally.
“Prices have now doubled, and that’s quite ridiculous,” Mr. Erlam said.
Thursday’s breach of $40,000 was so sudden, it surprised even bitcoin bulls. Alex Mashinsky, founder and chief executive of crypto-asset manager Celsius Network, on Thursday morning predicted that bitcoin was rising at such a fast clip, and demand was so robust, that it would hit $40,000 “in the next 10 days.” Instead, it happened in hours.
Bitcoin’s revival came as a surprise to many. After its last boom in 2017 faded, the digital currency entered a prolonged doldrum that lasted into early 2020. Much of the industry consolidated, companies enacted layoffs and venture capital money dwindled.
The downturn ended last spring. In May, billionaire investor
Paul Tudor Jones
called bitcoin a “great speculation” and disclosed that he owned some. In the months that followed, other notable investors joined the fray. Bill Miller began touting its potential.
Making bitcoin more accessible to retail investors,
PayPal Holdings Inc.
in October allowed users to buy and sell bitcoin, joining Robinhood Markets Inc. and Square.
Many of the new buyers are attracted by a speculative asset in an environment where risk-taking is being richly rewarded. Similar dynamics are at play in the stock market, with momentum-chasing investors snapping up stocks like
whose share prices have surged past their fundamentals. Tesla is up more than 750% over the past 12 months, while the others are up 625% and 350%, respectively.
The “risk-on” mentality has been the main driver behind bitcoin’s ascent, said Mark Dow, a former Treasury Department official and hedge-fund manager who has traded bitcoin on and off over the past several years.
Bitcoin’s potential as a hedge against a falling dollar has been a very effective selling point, he said, and it has helped draw in a lot of the new money.
A lot of that new money, moreover, is coming from professional investors that have more liquidity at their disposal than the individual buyers who drove bitcoin’s 2017 rally. “The money they bring to bear is massive,” he said. That, combined with a constrained supply, is forcing the price higher.
“All you need is a couple of fat guys trying to get through that window and it can squirt ridiculously higher,” he said. He has shorted—or bet against—bitcoin in the past, he said, but wouldn’t recommend it now.
“Would $200,000 surprise me? No,” he said.
With this burst higher, the market value of bitcoins in circulation rose to nearly $700 billion, pushing the market value of the entire cryptocurrency asset class to a record $1 trillion, according to CoinMarketCap. Bitcoin and the second-largest cryptocurrency, ether, comprise nearly 85% of that total.
Still, some people warn a violent correction could be coming. Mr. Mashinsky’s Celsius Network doesn’t just hold assets, but facilitates lending and borrowing for its users. He said he’s seen a high level of borrowing on his platform, which now has more than $4.5 billion in assets.
That level of margin trading, along with the overheated interest, is going to bring a counterpush, he said. “Sooner or later, the bears will accumulate enough pressure to see a correction,” he said, adding that he thinks bitcoin could fall back to around $16,000 to $20,000 in the first quarter.
Others agree a correction could be looming. Investors should expect not just one selloff, but multiple declines of as much as 25% as people take profits, said Gavin Smith, chief executive of crypto-services firm Panxora Group. Although he says he is optimistic about bitcoin’s growth, he warns investors to be careful.
“Bitcoin is far from being a magic money tree,” he said.
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