The price of Bitcoin has recently crashed. Although it is showing signs of another bull run, many are wondering if this is actually going to happen. Compared to other major cryptocurrencies’ prices, Bitcoin’s growth rate hasn’t been as competitive, leading many to remain sceptical about its breakout.
There are three schools of thought regarding Bitcoin and its end-of-year value. They can be categorised as the ‘bulls,’ the ‘bears,’ and those who think it will remain static. Each has a fixed monetary value they attach to a Bitcoin prediction for 2021.
Bulls. So far, this year, the bulls have largely had control of the cryptocurrency market, and the price of Bitcoin has been rising more often than dropping. At the beginning of the year, bulls (and many financial analysts) had a Bitcoin prediction for 2021 of $100,000.
Bears. On the negative side of the coin, bears feel that Bitcoin is currently overvalued, and the price is due a major correction. Many anticipated that correction was happening when the market crashed in May, but since that point, the price of Bitcoin has once again risen. True to form, bears still state that Bitcoin is overrated. They have a Bitcoin prediction for 2021 of between $20,000 and $30,000.
Static or Sideways Market. In the middle is a small group of analysts that believe that Bitcoin is currently around the correct price and will remain so for the remaining months of 2021. They point to growing adoption (positive) and political uncertainty (negative) as reasons why the price will not change. They have a Bitcoin prediction for 2021 of $40,000 to $50,000.
What Drives the Bitcoin Price?
So, who’s right? Well, let’s look at the different drivers of the Bitcoin price.
Firstly, Bitcoin is largely priced according to the available supply of the currency and the demand that people have for it. When the Chinese Bitcoin mining farms were closed in China, a significant portion of mining had to relocate elsewhere. Because there was less mining occurring on the blockchain, the difficulty of the algorithm dropped, making Bitcoin much easier to mine.
Lately, though, the algorithms have become increasingly difficult again, and this has meant that those looking to buy Bitcoin are not supplied as well as before. As a result, the price has taken an upwards trajectory.
Influence of The Media
Alongside demand, the media plays a crucial role in presenting the general public with a positive or negative image of Bitcoin. As uncertainty around Bitcoin grows, media outlets tend to focus on negative aspects, and this will normally drive the price downwards. But lately, the news around Bitcoin has started to improve as investor confidence returns to Bitcoin.
Unfortunately, the wrong headline from a mainstream media outlet can have devastating effects on price formation, and there is always an element of risk when discussing the news — it can spread uncertainty quickly and cause the price to drop rapidly.
Much of what the media is reporting on is the political events around the world that relate to Bitcoin. When China banned Bitcoin mining, this had a terrible effect on the price and caused a crash. When El Salvador adopted Bitcoin as legal tender, it caused a slight (very small) boost to the price. Depending on the size of the country involved and their reputation in the global economic area, political events can move Bitcoin’s price a lot.
For example, anything related to the US is likely to have a big impact on the coin.
Potential for a Bitcoin Drop
After the May crash, many analysts saw this as inevitable and predicted that Bitcoin would continue to drop. These analysts would fall in the ‘bears’ category above. Of course, there is potential for this to materialise, and the price of Bitcoin drops further. But this is unlikely barring a major political upset. Here’s why:
- China banning mining was just about the worst possible news Bitcoin could get with an estimated 70% of all mining occurring in China at the time. It would take something equally as devastating to set Bitcoin on a downwards trajectory again.
- There are counter drivers in place that are currently pushing the price up. Mining supply is reduced compared to how it was a few months ago, and demand has remained relatively stable. Alongside that, many media outlets are discussing cryptocurrency in a positive way at the moment as more institutions are taking it seriously.
What This Means for Investors
With Bitcoin, there is always an element of risk, and the fact is, no one has a crystal ball. There is an outside chance that Bitcoin could fall further. All indications at the moment are that this isn’t happening, and many bears have been liquidated on the futures markets in the last few weeks as the price continues to creep up.
Potential for a Bitcoin Rise
This is the most likely outcome given the current information we have available. As mentioned, negative media could once again drop the price, but it would need to be around a significant political event.
What This Means for Investors
Although the price is set to rise, the previous predictions of $100,000 by the end of the year are considered by many as unlikely. Looking at Bitcoin’s drivers though, this is within the realm of possibility and shouldn’t be dismissed outright.
Nobody has a crystal ball about what a price will be at any given future point. The key is to analyse your investments and buy into projects you believe have value after doing your research.