28 Dec Some context (and caution) on what’s driving Bitcoin right and what can come next.
I’m not here to tell you to invest or not in Bitcoin, but rather talk about some of the reasons Bitcoin is getting stronger right now, and how it relates to the overall US economy. My hope is that maybe people will stop treating Bitcoin growth as some vaguely magical thing that happens on wishes and dreams. Speculative investing certainly makes that happen, but there are larger reasons for the current growth cycle: institutional investors.
First of all, I want to make clear that what I’m talking about is more related to institutional investors (II) than anyone else. These are large entities or companies that look for ways to earn more money with the money they have, and on a scale well-beyond what a random person can do.
OK, some basic facts to get us started:
- The US dollar is strong ~right now~ this year, although falling falling in recent months.
- Interest rates are very low.
- Businesses are not expanding.
- The US economy and stock markets are both being propped up by the Fed and Congress.
Normally, when an II is sitting on a huge pile of cash, they invest it somewhere based on what’s going on with the economy. For (a simplified) example, they move money into stocks for gains when markets are doing well and into treasury bonds for interest when they aren’t doing well.
Now for various reasons, there just aren’t many good places to park huge amounts of money:
- A strong US dollar normally means invest in foreign economies, but Covid has crushed most growth opportunities there.
- Interest rates being low means little incentive to simply loan the money out or invest in treasury bonds.
- Businesses aren’t expanding, so even if interest rates were higher there simply isn’t much demand.
- The US economy might look good on paper, but it’s being driven by a rather narrow set of industries uniquely situation to benefit from a pandemic (mostly tech) and held up by Fed policy. As post-vaccine life takes hold in the next 6+ months there’s going to be major (but unclear) economic changes.
In short, institutional investment in Bitcoin right now has less to do with Bitcoin being great, and more to do with trying to figure out where to park money until economies start returning to normal.
So what does this mean for everyone else? At the absolute minimum, I would expect Bitcoin to drop as the economy recovers and IIs have better (read: traditional) places to put their money. They won’t abandon it or anything, but large transactions (sells) will impact the price. A few headlines of companies selling their stake in Bitcoin can easily trigger investor panic. In particular, look for signs that any of the above points are changing. If the US dollar weakens, interest rates increase, businesses start expanding, or the US economy stops being propped up by the Fed, Bitcoin is going to drop.