Historic Crypto Highs

Dear Rich Lifer,

Bitcoin topped $50,000 for the first time in history on Tuesday, February 15, meaning the cryptocurrency has doubled in value in only two months.

According to CoinDesk, Bitcoin peaked at $50,584.84, up about 5% for the day and more than 74% for the year.

The total market value of Bitcoin in circulation reached $940 billion.

Institutional Support

Brian Melville, head of strategy at trading firm Cumberland, says this surge is a result of supply and demand. Melville estimates that 150,000 new bitcoins were minted from August to December 2020. In the same time period, about 359,000 Bitcoins were bought, creating an imbalance that has continued into 2021.

The buying demand has not only rallied prices but has also brought about an acceptance and recognition of bitcoin as an actual asset in the eyes of regulators and lawmakers.

Just this month, The Bank of New York Mellon Corporation said it would start treating Bitcoin like any other financial asset. Mastercard Inc. followed suit, saying it would integrate Bitcoin into its payment networks this year.

Last week, Tesla announced it bought $1.5 billion in Bitcoin for its corporate treasury and said it would start accepting bitcoin as payment for its products soon. Following this announcement, Bitcoin prices jumped 10%.

Tesla is just the latest to join other companies that have disclosed bitcoin holdings. MicroStrategy Inc. purchased about $425 million worth of bitcoin last summer, and its CEO, Michael Saylor, has become an outspoken advocate.

Further, billionaire investors such as Paul Tudor Jones and Stanley Druckenmiller have entered the bitcoin frenzy, attracting more attention and assisting the rallying of Bitcoin.

Financial-service companies — such as apps from Robinhood Markets Inc. and Square Inc. — are now allowing customers to trade Bitcoin.

A Different Bullrun?

These developments have led many crypto investors to believe this latest bull run is different from rallies in the past.

Bitcoin surged to nearly $20,000 in late 2017 but lost more than 80% of its value the following year. Bitcoin proponents now say that the 2017 bubble was driven by retail speculation, but the current cycle is being fueled by demand from institutional investors.

Mr. Saylor agrees, noting:

I think Bitcoin is a much more stable asset class today than it was three years ago…I think that starting in March of 2020, you saw institutions start to arrive, and I think in 2021 you’re going to see that trend continue.

Elon Musk, Tesla’s Chief Executive, shared a similar sentiment in an interview on the social-networking app Clubhouse commenting, “I think Bitcoin is really on the verge of getting broad acceptance by sort of the conventional finance people.”

Skeptics Weigh-In

In order to understand why many are skeptical about Bitcoin, we need to understand its history.

Bitcoin was created by Satoshi Nakamoto, the pseudonym for the anonymous founder who had a vision of creating a digital version of cash. Bitcoin was unveiled in 2008, and its network went live in early 2009.

The most basic way to explain Bitcoin is to say it is a software program designed to allow people to exchange value directly with one another.

It is created by a process known as mining by which people solve complex mathematical puzzles using powerful computers to unlock or “mint” new coins. The maximum number of Bitcoins that can be generated is 21 million, under the earliest design of the cryptocurrency. However, the coins themselves can essentially be divided endlessly, down to the eighth decimal place, or into hundred millionths.

At first, Bitcoin was exalted as a potential solution to inflation, poverty and government oppression. However, the community that traded the crypto was known for scams and Ponzi schemes.

Caitlin Long, the founder and chief executive of the crypto-focused Avanti Bank, explains that when Bitcoin started, it was basically an anarchist project but has since become more mainstream.

This change began in 2013 when Silicon Valley and entrepreneurs began putting more money and effort into making Bitcoin a more stable financial service.

However, critics still maintain that Bitcoin is less of a currency and more of a speculative fixation. With traditional currency, the price is a result of an open market and the desires of the governments that issue said currency.

With Bitcoin, the value is solely the result of what investors are willing to pay. No central bank or government can dictate the currency’s value. It’s an emotionally driven market with no limits to how high or low it can go.

Bitcoin skeptics say that cryptocurrency is just a high-risk, high-reward game played among investors looking for massive returns in an era of easy money. They see investors chasing momentum as the price of bitcoin has risen.

Many finance experts remain doubtful about investing in the digital currency because of its volatility and lack of practical use — last time we checked, you couldn’t buy milk at the grocery store with Bitcoin.

Economist and vocal Bitcoin critic Nouriel Roubini points out that even commodities like gold have some utility. He says, “Many are buying at prices that are ridiculous” and predicts “they’re going to get burned and once they get burned they are not going to come back.”

European Central Bank President Christine Lagarde, who agrees with Mr. Roubini, recently said that Bitcoin wasn’t a real currency and the ECB wouldn’t buy or hold it. She has also called for more regulation of cryptocurrencies due to their use in money laundering.

This is a legitimate concern. In fact, in 2020, illicit activity using cryptocurrencies totaled about $10 billion, and in 2019, it totaled $20 billion, according to a report from analytics firm Chainalysis.

Whether you are a proponent of Bitcoin or a skeptic of crypto, there’s no way to know for sure whether Bitcoin is simply a bubble in the markets or the future of exchanging currency.

We will all have to wait and see…

To a Richer Life,

The Rich Life Roadmap Team

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