The recent rally in Bitcoin price (BTCUSD) has left investors with an important question: Will the rally last?
The quicksilver nature of cryptocurrency markets makes it difficult to answer that question with clarity. Bitcoin's 2017 rally transmuted into a prolonged slump less than a year later. While analysts and commentators have stepped up with optimistic predictions, it is far from certain whether Bitcoin price will continue to increase.
Bitcoin analysts and proponents have predicted price targets of $50,000 for the cryptocurrency next year.
Some commentators also say that the pandemic might have proved to be a turning point for Bitcoin's acceptance as a "quasi-digital gold" for investors.
A Trillion Dollar Target?
The risky underpinnings of cryptocurrency markets will appeal to traders and investors in 2021, according to analysts from Bloomberg. "A risk-off decline like the 1Q could return Bitcoin towards the $10,000 support level in 2021, but we believe the path of least resistance remains higher," the analysts wrote. In simple words, investors will continue to embrace the risk and price volatility inherent in Bitcoin investing in 2021.
Bloomberg analysts have predicted a price target of $50,000 for Bitcoin, implying a $1 trillion market cap for the cryptocurrency. They cite increased demand for the cryptocurrency, mainstream adoption and interest, and diminished supply as Bitcoin reaches its 21 million supply target as reasons for their estimated price.
BTIG analyst Julian Emanuel has estimated a similar figure for the cryptocurrency's price next year. But his reasoning is different. Emanuel compared Bitcoin's price to the Nasdaq 100 (NDX), a market cap-weighted index consisting of 103 non-financial companies at Nasdaq. The index reached a peak valuation during the dotcom bubble and crashed soon after before beginning another gradual ascent.
"It took NDX 14 years to rise above its parabolic 'blowoff top,' then six years to rise a further 150%. Bitcoin appears poised to exceed the 2017 parabolic 'blowoff top' in a mere three years. Should Bitcoin's speed of ascent keep pace with the past three years and the degree of the rally approximate that of NDX, $50,000 per Bitcoin is a reasonable year-end 2021 price target," Emanuel wrote.
A New Future or a False Rally Redux?
Momentum can be a powerful price propellant. The actions of a single investor can induce others, who don't know much or any better, to follow them into a trade.
The price target predictions for Bitcoin bring back memories of 2017, when equally ambitious (and in some cases outlandish) predictions were made for Bitcoin's future. Back then, the cryptocurrency's astronomical prices fell as quickly as they had risen, leaving a trail of disappointed investors and shuttered investment firms.
But the conditions were different. Asian investors and retail traders were reported to have driven Bitcoin's previous price increase. They quickly moved in and out of trades, booked profits, and abandoned crypto markets not soon afterward. This move sucked out much-needed liquidity from crypto markets and crashed asset prices.
According to crypto-forensics firm Chainalysis, American investors driving the rally the rally this time around. Institutional firms and hedge funds, interested in parking their funds for the long term, are also beginning to pour funds into the asset class. In the long term, such liquidity should help propel future price increases because it strengthens the market and tamps down the intense volatility that has characterized crypto markets.
If history is any indication, the COVID-19 pandemic may have also proven to be a turning point for cryptocurrency markets. Prominent economic historian Niall Ferguson told online publication Barron's that pandemics are