It’s been a few volatile months for Bitcoin.
On Friday alone, the cryptocurrency rose briefly by 20% after billionaire Tesla founder Elon Musk changed his Twitter biography to “#bitcoin”.
While those gains were quickly abandoned, there are parallels between Bitcoin’s rapid surge and the GameStop stock craze that continues to dominate the global news cycle.
The battle of hedge funds short sellers versus retailers coordinating on social media to raise the price could be a sign of what is to come for the world’s largest cryptocurrency.
Short circuit of bitcoin
Data from crypto news and analytics firm The Block shows hedge funds are short of more than $ 1 billion in Bitcoin.
This term “shorting” means that traders and hedge funds are betting that the price of Bitcoin will go down. These short positions increased from October 2020 when the recent Bitcoin rally hit.
In the meantime, individual investors are still buying Bitcoin alongside other cryptocurrencies as they bet that the price will go up.
Retail brokers like Robinhood have expanded trading restrictions on stocks like GameStop. From Friday, the trading app will also limit trading in cryptocurrencies.
Unlike GameStop, a brick and mortar mall that closed stores before the pandemic and resulted in widespread closings, analysts say the basics of Bitcoin tell a more promising story.
JPMorgan analysts believe the price of Bitcoin could rise as high as $ 146,000, and the global head of CitiFXTechnicals says the charts are signaling that Bitcoin could hit $ 318,000 by December.
Part of the difference in the 2020 Bitcoin rally from the last spike in 2017 is that institutional investors are now adopting Bitcoin, giving it a newfound legitimacy, and helping to eliminate the reputational risk of investing in the cryptocurrency.
“We have seen the majority of the people like insurance companies, asset managers, hedge funds and corporate balance sheets hit the market in 2020,” said Michael Bucella, general partner at crypto firm BlockTower Capital.
The surge in interest from established financial players has not only reformed Bitcoin’s image, it has also created a supply bottleneck.
Bitcoin supply crisis
“There is a large and emerging group of institutions with enormous capital bases that are remapping themselves in this area,” said Bucella. “And when you think about the supply-demand model of a commodity, over time the supply curve drops to effectively zero and demand increases exponentially.”
There will only ever be 21 million Bitcoins because, like other cryptocurrencies, it was built on the principle of finite supply. The total number of bitcoins mined is around 18.6 million and is thus approaching its maximum threshold.
And institutional investor interest does not seem to be slowing.
“There is a lot of demand and there is not enough bitcoin supply for every financial institution to have its own reserve for its customers,” said McKenzie Slaughter, a member of the Black Women Blockchain Council.
Bitcoin vs. GameStop
The GameStop saga was driven by a large group of Reddit day traders, at least some of whom are motivated to want to stick with Wall Street. They coordinated online to pile up in GameStop to increase the share price, with the specific purpose of making hedge funds lose money.
The same anger and frustration at how institutional investors make profits has also contributed to the rise of Bitcoin. A large part of the intrinsic value of the cryptocurrency comes from the fact that it is neither tied to any government nor tied to any other currency.
When you invest in an independent cryptocurrency like Bitcoin, you are putting your money on a technology and currency that could one day replace the modern financial system. This is certainly not lost for retailers looking for the ultimate way to cut institutional investors out of the equation.