Bitcoin got the new year off to a scorching start as investors continued to pile on bets that the digital currency’s price will keep rising.
The price of bitcoin rose as much as 19% over the weekend, trading as high as $34,452 on Sunday, according to CoinDesk. It finished 2020 at $28,966, more than quadrupling on the year.
In many respects, what has happened in the first few days of 2021 resembled a stock market “short squeeze,” said AvaTrade analyst Naeem Aslam. He was referring to the cascade of buying that can happen when investors respond to a price jump by buying back stock they have sold in an effort to keep their losses from mounting.
It wasn’t just bitcoin that took a wild ride. The price of ether, the second-largest cryptocurrency, rose as much as 35% over the three-day weekend, trading above $1,000 for the first time since early 2018. Ether added to those gains Monday, most recently up 15% at $1,036.
The moves were so strong they are likely to spark a backlash, Mr. Aslam said. “Traders need to be mindful that a correction is looming.”
A correction of sorts did occur, again illustrating the volatility of the asset class. After bitcoin hit its new high, the price fell 15%, trading as low as $29,069 early Monday morning. Most recently, it was trading at $31,906.
Bitcoin, introduced in 2008, was designed as a digital version of cash that could operate outside the control of governments or central banks. Its software runs on a network of linked but independent computers, and that decentralized structure makes it ideal for moving money quickly and cheaply across borders.
Last year when the Federal Reserve cut interest rates, pushing down the value of the U.S. dollar, bitcoin became a fashionable bet as an inflation hedge, though that status has yet to be proved.
The price of bitcoin is skyrocketing, driving a rally of momentum trading that’s pushed its value higher than it’s ever been before. WSJ explains how bitcoin trading works, and why the volatile digital currency is reaching all-time highs. Illustration: Jacob Reynolds/WSJ
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There was also a notable influx of professional traders last year, highlighted by billionaire investors like
Paul Tudor Jones
Companies such as
and Massachusetts Mutual Life Insurance Co. started buying bitcoin as well.
Trading platforms including
PayPal Holdings Inc.,
Square Inc., Robinhood Markets Inc., and Webull Financial LLC began to allow their customers to buy and sell it, bringing in a new wave of smaller investors. The largest U.S. cryptocurrency exchange, Coinbase Inc., plans to conduct an initial public offering in 2021, giving the public its first chance to buy equity in a major industry company.
Those moves have sparked a new wave of investment into what is essentially a very small market. The total market value for bitcoin is just under $600 billion, far below the market cap of the biggest individual stocks, like
currently worth more than $2 trillion. It is also well below the total market value of the gold market, which was about $11.9 trillion at the end of 2019, according to the World Gold Council.
With the latest run to record highs, there is a discernible split in investor opinion about what comes next, said
the founder of an over-the-counter trading firm called NautilusTech. About half of the investors she has talked to are expecting a correction, and half “are cheering it on and trying to figure out where their profit-taking price point should be.”
That is coming just as outside interest appears to be peaking again.
Searches of the word bitcoin on Google have reached their highest level since the 2017-2018 rally, according to research firm TradeBlock. “In recent days a flurry of media articles and trending
topics has spurred renewed interest in the asset for retail investors,” the firm wrote in a note.
Meanwhile, the gains for bitcoin and ether have been mirrored by a selloff in the third-largest cryptocurrency, XRP.
XRP is down more than 50% since the Securities and Exchange Commission sued the company that created it, Ripple, alleging the company should have registered XRP as a security. XRP most recently was trading at 23 cents.
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