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Bitcoin breaks $37,000,: A fairytale or is the crypto about to rocket?

Bitcoin (BTC) is continuing to set new price records, breaking above $37,000 for the first time ever on Jan 7, and continues rising above it at time of writing today. Is this sustainable? Where is the reality in all of this?

Bitcoin has now gained roughly 80% since breaking into new highs on Dec. 16, and is up 22% in seven days Crypto bulls have said that bitcoin’s recent rally is markedly different than a late 2017 bubble that saw it zoom close to $20,000 It’s a bubble about to burst again

For FOMOs, it’s a fairytale beginning for 2021. Bitcoin (BTC) is continuing to set new price records, breaking above $35,000 for the first time ever on January 5, then above $37,000 yesterday and today (as of writing).

After setting its past record of roughly $34,800 on Jan. 3, BTC posted a fast retracement down to $28,000 the following day.

However, the crash was short-lived, as BTC quickly recovered. 

Bitcoin has now gained roughly 82% since breaking into new highs on Dec. 16, and is up 24% in 9 days.

By the way, Ethereum has also pushed back above $1,100, gaining 44% over the past week.

Throughout this price action, cryptocurrency traders starting cutting leveraged positions across the board, according to estimates calculated by cryptocurrency data provider CryptoQuant. Taking to Twitter, CEO Ki Young Ju said the change signaled traders were “uncertain” and “scared” about the market’s “next move.”

So, is this sustainable? Where is the reality in all of this? 

A Bull run

“It’s rather simple I think,” said Matt Kaye, managing partner at Santa Monica-based Blockhead Capital, talking to CoinDesk about bitcoin’s price action. “There are more spot buyers than spot sellers going into a year that is likely going to transform US fiscal policy for the next decade.”

Coindesk says Bitcoin’s latest surge comes as a result of the Senate runoff election in Georgia where some are speculating that a Democrat-controlled Congress could exacerbate current inflation concerns shared by many bitcoin investors.

One of the biggest U.S. investment banks thinks the digital currency could have much further to run.

In a note published Monday, JPMorgan made a bold long-term price target for bitcoin, claiming the red-hot cryptocurrency could rally as high as $146,000 as it competes with gold as an “alternative” currency. 

Bitcoin’s market cap currently stands at more than $600 billion. According to JPMorgan, it would have to climb by 4.6 times to match the $2.7 trillion of private sector gold investment.

The caveat is that for bitcoin’s market value to reach that level, its price volatility would need to drop substantially to give institutional investors the confidence required to make large bets.  

“A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is in our mind a multi-year process. This implies that the above $146k theoretical bitcoin price target should be considered as a long-term target, and thus an unsustainable price target for this year.”

JPMorgan has invested heavily in the space, creating its own digital currency called JPM Coin and establishing a new unit devoted to blockchain.

Crypto bulls have said that bitcoin’s recent rally is markedly different than a late 2017 bubble that saw it zoom close to $20,000 a coin, only to sink as low as $3,122 the next year. That’s because institutional investors are starting to buy in, and this is seen as a crucial confidence boost for the digital asset.

Many institutional investors are using investment vehicles like Grayscale’s Bitcoin Trust as a means of buying into bitcoin. According to JPMorgan, more than $3 billion has flowed into the Grayscale Bitcoin Trust since mid-October while gold ETFs have bled $7 billion.

Read: Forget price volatility, Bitcoin’s credentials as a global currency rising

A surprise that may blast Bitcoin into new orbits 

Should a long speculated exchange-traded fund (ETF) for BTC get the nod, watch out! Bitcoin’s price could skyrocket.

ETF heavyweight VanEck filed a Form S-1 registration statement for a new bitcoin ETF called the “VanEck Bitcoin Trust” on Dec. 30, 2020. 

Unlike VanEck’s last filing for a bitcoin futures ETF in 2017, the new one would hold physical bitcoin. That key distinction could create an even bigger imbalance between the demand for bitcoin and supply than the one that has recently sent prices surging, argues one Wall Street pro that covers the crypto space.

“With the price of bitcoin reaching new heights, one of the questions that has arisen is whether 2021 will be the year in which the U.S. Securities and Exchange Commission finally approves a bitcoin exchange-traded fund that would enable anyone to purchase the cryptocurrency as easily as they could buy a stock. An ETF that tracks the virtual currency could have a dramatic impact on both its growth as an asset class and the industry being built around it, in our view,” says BITG analyst Mark Palmer.

Read: A new year, a new high: Bitcoin crosses $33,000 but can it reverse course to $0?

A wake-up call

Skeptics view bitcoin’s 2020/21 rally as reminiscent of the frothy 2017 market action. They see it as a speculative asset with no intrinsic value and a bubble that is likely to burst at some point.

“Bitcoin is an economics lesson masquerading as an asset,” writes Reuters

“It’s a textbook case of speculative demand meeting scarce supply.”

Reuters said BTC is unlikely to replace gold or any fiat currency for that matter. 

First, it’s extremely volatile: its value jumped around 14-fold in 2017 before falling by over 70% in 2018. Its use in goods purchases will probably remain limited, too: Why would anyone buy, say, a coffee with something that could massively increase in value within weeks?

Reuters also argues that ownership is highly concentrated. 

The largest 2% of anonymous accounts tracked on its ledger control about 95% of supply, according to Flipside Crypto. 

It’s a bubble about to burst and here’s why. 

Ultra-low interest rates have pushed more investors into risky assets. Even traditional institutional players like BlackRock are paying attention, although only tentatively. 

And retail investors can now trade bitcoin on apps from Robinhood, PayPal, and Square. When tight supply meets rising demand, prices can increase significantly, generating more demand. That’s the self-sustaining engine of all bubbles.

For bitcoin to become a legitimate asset, ownership would have to become less concentrated and its value less volatile. And it would have to avoid further regulation, yet be held by more governments.