Bitcoin crypto currency shows its true nature

Payment service Paypal offers users the chance to place a position in bitcoin. However, that does not mean that the crypto market is maturing. The scale is far too small for that and regulation falls too short.

It's a party in the stock market. In the Netherlands, the AEX has risen by no less than 13,5% since the end of October. Earlier this week, the US Dow Jonex Index climbed above the 30.000 mark for the first time ever. The optimism is mainly fueled by the good news about the high effectiveness of Covid-19 vaccines.

There is also increasing evidence that US President Donald Trump is resigned to Joe Biden's election victory. However, stock market gains pale in comparison to the crypto rally. The bitcoin price has almost halved within a month. Digital currency ripple has even doubled within a week. What's behind those insane rises?

Confidence Crisis
Much has been written in recent years about cryptocurrencies as an alternative to conventional currencies. The theory is that major parties are losing confidence in central banks and national governments. They see their debts continue to rise due to large budget deficits. It is absolutely true that government debt is rising much faster than anyone could have imagined before the corona outbreak.

But there is no question of a crisis of confidence at all. Otherwise, investors would have bought their money in gold instead of stocks of companies with earnings in euros and dollars. The main reason for the crypto rally must therefore be sought in scarcity. There is only a limited number of these digital coins on the market. Moreover, that number is growing more slowly. It costs more and more computer power to create new cryptocurrencies ('mine').

Piggybacking on Bitcoin Rally
A small supply is matched by a growing demand. Given the relatively small size of the crypto market, this quickly leads to major shifts. Even after the recent surge, the total value of all bitcoins combined is just under $300 billion. Compare that to the $5.000 billion traded each day on foreign exchange markets.

Yet the influence of bitcoin is slowly but surely increasing. Since mid-November, payment service Paypal has made it possible for its 300 million users to hold bitcoins. It's no wonder that the currency's gains gained momentum at that time. In the crypto world, many traders are anticipating a further rise.

pure speculation
Digital currencies are much less in the spotlight than during the previous big rally in 2017. Once bitcoin & co are really back in the spotlight and all kinds of investors want to piggyback on the rise, the price may well rise towards $100.000. For now, that's pure speculation. The price antics of cryptocurrencies are impossible to predict.

As long as there is no scale and proper regulation, the erratic exchange rate will mean that these currencies will not take over the role of traditional currencies for the time being. Still, there is an element of digital currencies that has a good chance of conquering the traditional currency market as well. The Chinese government has developed the digital payment system DCEP (Digital Currency Electronic Payment). This system uses blockchain: the same technology that made cryptocurrencies great

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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