Yesterday, bitcoin exceeded the magical price of $23,000 for the first time. This means that the digital currency has increased in value by more than 220% since the beginning of the year and the current market capitalization is 430 billion USD. This is an impressive achievement that was declared a failure in March as BTC fell by 50% in a single day during the liquidity crisis.
From weak to strong hands
But investors, investors and traders are sometimes short-sighted. People panicked. They were scared. There were many unknown factors and hardly any certainties. Bitcoin was dumped everywhere and by everyone, because/when the price dropped rapidly in March. Sensibly that seemed the right choice for many.
But eventually the weak hands sold and their bitcoins were transferred to the strong hands. The bitcoin rate has risen more than 500% since it fell to $4,000 in mid-March.
Gold and bitcoin
Gold and bitcoin have proven throughout history to be uncorrelated to the equity and bond markets. In addition, gold and bitcoin can act as safe haven assets. However, this all changes during the liquidity crisis in March. In the short term, any asset that can be sold in a liquid cash market will be sold. Investors are insensitive to price. They need as much cash as possible as quickly as possible that they traditionally make irrational decisions to optimize their liquid positions.
This is exactly what happened with gold during the 2008 crisis, except that with bitcoin it all went much faster this year.
Hoping for healthy money
But not everyone leaves the ship at the first sight of problems. There is a group of people, mostly individuals, who strongly believe in the concept of healthy money, sound money. These people have taken the time to inform themselves about the technical structure, monetary policy and the possible long-term benefits of bitcoin. They are convinced that the sound money properties of bitcoin are superior to any other form of money.
They don’t let a rising or falling dollar value upset them and don’t sell their bitcoin. These are the strong hands. Their conviction is strong. In March, they did exactly the opposite of what the market was doing. To quote Bane: Oh, you think bitcoin is your ally. But you merely adopted bitcoin; I was born in it, moulded by it. I didn’t see fiat until I was already a man, by then it was nothing to me but BLINDING! It is these strong hands that bought bitcoin for low amounts in March.
Nothing more than supply and demand
At the time, most people would have thought you were crazy if you thought bitcoin was going to break through $20,000 this year. The only people who thought that was a realistic scenario were the strong hands. They knew that the bitcoin block halving would have a big impact on the supply of bitcoin, and that this alone would lead to huge price increases.
Add to that rising demand, and suddenly $20,000 sounds pretty logical. Guggenheim’s CIO, Scott Minerd, was at Bloomberg this week and said that he and his colleagues felt that bitcoin should be worth $400,000 right now. They manage hundreds of billions of dollars and started buying bitcoin when the exchange rate was $10,000. This is the kind of institutional firepower that large multi-billion dollar asset managers bring. And what the strong hands already foresaw.