Update:
Bitcoin moved up to US$29,837 on January 2, 2021 (NZT). Then it moved up decisivively to over US$33,000 in the early hours of January 3, 2021 (7:56 am NZT). That makes it the largest daily jump (+US$3666) ever. In turn, that pushes the price in New Zealand dollars to over NZ$46,000.
In USD, the price has now risen almost +15% in the two-plus days of 2021.
December 28, 2020
In terms of asset price inflation, the dominant cryptocurrency Bitcoin is leaving New Zealand house prices in the dust.
Overnight, the bitcoin price rose to US$28,222 and a new all-time high.
And remember it started 2020 at $US$7,280. That makes it a +150% annual rise. In 2019 it rose +97% net over that earlier year, although that period did feature some wild swings in between.
However for 2020 it has mostly been gains, with the biggest and fastest rises in December. December alone has posted a +49% rise and +15% of that is in just the last week..
A feature of December's rises is the number of days of US$1000+ gains - nine in the 28 days so far, and over the past three days, the price has risen +US$3,400. This surge is far and away the largest of any period in the crypto's history.
What is driving it? It is hard to be sure when you are in the middle of the event, but some things seem likely culprits.
Firstly, a few 'whales' have suddenly become interested. A big move in by a major fund manager can shift this relatively small market quickly. And at least three 'whales' are known to have moved in, during December. They include Skybridge Capital* who invested US$25 mln so far, MassMutual who are in for at least US$100 mln, and Guggenheim Funds who may have invested up to US$500 mln. There are others too. Such major shifts in can really move a market that was only worth US$350 bln at the start of December and is now worth more than US$510 bln. Their moves are effectively manipulating the price up dramatically.
One of the reasons these so-called heavyweights are making the shift is because they are watching the fast-limiting of bitcoin supply. Already 18.5 mln of the maximum 21 million bitcoins have already been mined are in circulation. But from here on, the increase in supply will be very slow and it is estimated that not until 2140 will all 21 million bitcoins be circulating. That means only 2.5 mln more (12%) will come along over the next 120 years. Effectively the growth of supply has ground to a virtual halt, so demand rises will just mean price/value rises. These 'whales' only see upside, and their entry into the demand side at scale will itself drive the price higher. 'Whales' like bets with only upsides.
And there is a short-term effect as well. With the end of the year looming, some fund managers may also be buying bitcoin so they can brag next year about being smart enough to get in in 2020 (while glossing over the price they had to pay). This sort of positive feedback can run - until it doesn't. It is an effect known as "the greater fool theory", in this case valid because the value is only what someone else, a buyer, thinks it is.
In the real world, the worry about inflation is rising. Is the surge in asset inflation about to spill over into consumer inflation? This is essentially a worry about the debasement of fiat currencies. Central banks everywhere are printing money with abandon trying to stave off the worst economic effects of the pandemic. In the US, pandemic relief fiscal packages are creating an enormous debt burden, compounded by irresponsible tax-cuts-for-the rich packages passed over the past four years. These actions are viewed by many as potential catalysts for inflation and bad for fiat currencies, both of which could be positive for bitcoin.
For all that, the narrative could be quite different next week. After all the runup in the bitcoin price is only stated in terms of the background fiat currencies, and the 'value' is always translated into what the fiat currencies will actually buy. Bitcoin is neither a medium of exchange, nor a unit of account, not even a standard of deferred value. It is currently only functioning as a store of value. There are many other effective stores of value, although right at this time bitcoin is hard to beat.
Since we started preparing this article, the price of one bitcoin has fallen back to US$27,106. Volatility is extreme at present.
* Anthony Scaramucci's investment bank.
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