Bitcoin smashes through past $64,000 record: Is $100,000 in sight?

Whether bitcoin will go up or down over the long term remains to be seen, but one thing is for certain. It is a highly volatile asset class. This volatility imparts a lot of momentum to bitcoin, whether on the upside or downside. Consider this: in May, bitcoin rose to $64,000 for the first time a breath-taking one-year rally that saw it go up 10 times.

But a combination of news -- including the fact that Elon Musk, one of the world’s most vocal and visible backers of cryptocurrencies was walking back in his support of bitcoin -- saw in a crash to $28,000 in a matter of months. Just as soon, it went past $64,000 again, swelled by a slew of positive news, including the launch of the world’s first Bitcoin Futures ETF.

It is this momentum that could possibly take bitcoin to higher levels, given that the cryptocurrency has seen a spate of good news, including its ever-increasing integration with financial systems.

Analysts have looked at a series of technical indicators to gauge bitcoin’s price level in light of its charts and price momentum. For instance, its relative strength index, which is considered a bogey for momentum, is currently at 73. A reading above 50 indicates positive momentum, while a reading above 80 indicates overbought territory.

Analysts also look at bitcoin’s price in view of its quadrennial halving cycle, as part of which mining rewards are halved. When looked at from the standpoint of the halving cycle, since bitcoin crossed $20,000 in December 2017, a valuation pegs bitcoin at $200,000 in the near future.

According to a Twitter user, TechDev, who writes frequently on the cryptocurrency, bitcoin going past $200,000 “looks almost too programmed”.

There is another valuation method used by bitcoin analysts: stock-to-flow model (S2F). To determine and forecast BTC price, it takes into account the number of coins in circulation and the inflow of newly minted coins.

As per the S2F model, Bitcoin could touch the $100,000 mark by December 2021. This model of technical analysis had suggested BTC should be around $88,000 in July this year. But several factors including China’s crackdown on bitcoin mining brought the market down. However, analysts believe that BTC has emerged stronger from China’s anti-crypto measures.

Bitcoin has seen a series of positive news. From being adopted as legal tender by El Salvador to the recent launch of Bitcoin futures ETF, the cryptocurrency world believes that bitcoin’s acceptance as an asset class, or even potential medium of exchange or store of value, is highly likely.

The other thing investors must look at is acceptance of not just cryptocurrencies, but also other solutions made possible by blockchain technology, as an indicator of sentiment. Over the past few years, the emergence of decentralised finance, underpinned by blockchain has given rise to a number of solutions, such as non-fungible tokens (NFTs) etc.

While momentum and news flow seem to be in favour of Bitcoin, investors should remember it has inherently a highly volatile class, meaning it could be subject to swift crashes even if it goes up in the long term. This means investors – which often tend to act in a herd – could come in at the top lured by recent gains, and exit in panic following a crash, depriving themselves of gains.

The other thing to remember is bitcoin is a fundamentally new asset class and has zero cash flows, unlike stocks. This means its value largely stems from the perceived store of value. In other words, people may be buying bitcoin because they believe it will go up, which causes prices to go up. Such perceptions can change quickly, especially when prices go down. And over the long term, its true value will emerge only if bitcoin has truly been able to demonstrate its utility not just as a speculative asset class but also as a technology that has vast use cases in society. Absent this, its price could go down as swiftly as it has risen.

Investors should not ignore cryptocurrencies as an asset class and bitcoin can become a small part of their portfolios. But it is important to not go overboard. Invest only as much money as you can afford to lose.