Bitcoin in Review Going into 2020
As 2019 comes to an end, the still-young and somewhat contentious crypto market has registered an exceptional achievement: one of its own, Bitcoin, was the best performing asset of the year. From December 31, 2018, through the last week of 2019, the price of Bitcoin doubled.
The 10-year-old decentralized currency greatly exceeded all other key global assets — and managed to achieve this in an especially positive year for all markets. Since the beginning of the year, S&P 500, the leading stock index in the US and a barometer of the global market, has shot up 28%. Oil has climbed 34%. These two sum up a strong year, yet they are nothing close to the rise of Bitcoin. Other major assets gave relatively modest returns for such a phenomenal year: Gold climbed 15% and the most conservative investment, the US bonds index, rose 7%.
It’s also worth mentioning that 2019’s highly impressive performance tells only part of the story. Together with the entire crypto market, Bitcoin was in a slump at the beginning of 2019 after crashing down from the highs of 2017. Stocks, too, began 2019 after a particularly gloomy end to 2018.
There are two main reasons for the strong year. One can be attributed to certain activity on the part of the White House and the second to historically low interest rates. The two are related, and we’ll soon explain how.
The fundamentals of the global economy weren’t well positioned for a strong year. Throughout 2019, growth was steady but very modest, and the huge pile of debt kept increasing. No one could have expected that despite these conditions, plus the rollercoaster of trade disputes, international bewilderment, and an endless stream of tweets, we would see the market produce one of the best years ever. In retrospect, one could say that it was the perception of the economy as shaky that allowed traders to reward the market with a boost every time positive news was reported.
Another explanation for the rising markets is the era of low interest rates, which started after the great financial crisis of 2008 and still shows little sign of ending. These low rates encourage traders to take larger risks. Since banks don’t offer the high rates of return investors prefer, they seek better rates elsewhere, which pushes investment in the stock market. Even after the central banks in Europe and Japan adopted a negative interest rate — that is, you need to *pay* someone to borrow your money — the pressure to seek income in stocks grew even higher. Central banks tend to embrace this policy to boost investments. Ideally, these tools should be used only for a short time and not for more than a decade as they have been now.
The White House has forcefully nudged the Federal bank in the United States to lower interest rates, even below zero as we have seen in Europe. The danger is that pushing the stock market to that degree will create a bubble that will eventually burst — and there are many who believe this moment is near.
Keeping in mind that after all its ups and downs Bitcoin is the best performing asset of the decade, with a return of thousands of percent, the short answer is that the experimental decentralized currency is showing itself to be a trusted and lucrative asset.
Looking closely at 2019, we find two main reasons for the achievement of Bitcoin:
Not necessarily. During 2019, Bitcoin continued to experience huge volatility, which is always one of the drawbacks of investing in digital currencies. As an example, at its peak in July, Bitcoin was up 250% from its price in January — and fell to “only” a 100% rise by the end of the year.
Besides volatility, the two main limitations of Bitcoin and the crypto market are scaling and usability. There is a continuous effort by cryptos on these fronts, including the development of the Lightning sub-network of Bitcoin and the restructuring of Ethereum. Until these developments will be fully in effect, the crypto market is still focused on two paths: as a speculative investment and as a store-of-value, a version of digital gold.
Apparently, these paths are relatively modest. Even though the prices rocked in 2019, the stream of new users is still small. Larry Cermak from “The Block” analyzed the traffic of 37 crypto exchanges from April to September and found that the total number of monthly visitors has dropped significantly, from 150 million to 103 million. Similar results were found when checking the results of internet searches for terms from the crypto world. At the heyday of 2017, before Bitcoin’s all-time high, these indicators were on a strong positive trend — with a lot of attention that resulted in new investors in the crypto market.
According to the digital gold thesis, the goal to make Bitcoin, or any other cryptocurrency, into a payment tool isn’t relevant anymore. Therefore, one shouldn’t expect such a strong stream of new users. Instead, we could expect to see slow and steady growth in usage by sophisticated investors, and this already happens. The years to come will reveal whether new sidechains, privacy solutions, and better user experience through crypto exchanges, custody services, and digital wallets will advance adoption and enlarge the circle of users.
In the traditional markets, it isn’t clear how long this party will continue, with the toxic blend of low interest rates, growing debts, and very modest economic growth. It is possible that the appetite for risk, and shortage of investment options, will lead to the crypto market as an alternative, but this is still mostly speculation. Will the great performance of 2019 attract more traditional investors into the crypto market? This is the most intriguing question going into 2020, and will continue throughout the next decade.