Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
This week, we cover the looming stablecoin regulations proposed by the U.S. congress, and the effects they could have on broader cryptocurrency markets. As well, we discuss three key factors pushing Bitcoin past it's all-time high.
This is a two-part series this week, so check out the analysis of the stablecoin act here, and below for a dive into Bitcoin’s all-time high.
3 Key Indicators Driving Bitcoin Past $20,000
Bitcoin has surpassed the long-awaited $20,000 price mark. After flirting with this price in December 2017 and for the last month, Bitcoin finally reached this milestone. Following the recent price run-up, Bitcoin is now up 190% (almost 3x) in 2020 and 93% since October.
This raises the questions: why is Bitcoin going up? And is this time really different from 2017?
Though there is not just one simple answer to these questions, blockchain data extracted from the Bitcoin blockchain provides valuable insights highlighting the trends pushing Bitcoin past $20,000.
Bitcoin supporters have been anticipating institutional adoption for years, and it has finally arrived. Though this trend began a long time ago, 2020 has been the year when institutional investment in Bitcoin took off.
Asset managers such as BlackRock and Fidelity have seen a large amount of their clients dive into Bitcoin. Rick Rieder, BlackRock’s CIO, even went as far as stating that Bitcoin “could take the place of gold to a large extent.” Gold being an asset with an estimated market capitalization estimated between $9 to $11 trillion, this is what institutional investors refer to as a bet with asymmetric upside.
Corporations such as Square, MicroStrategy, MassMutual and Ruffer Investments have publicly disclosed Bitcoin investments in 2020. Renown Wall Street investors such as Paul Tudor Jones and Stanley Druckenmiller have also purchased Bitcoin themselves. These are just some of the notable investors and companies that have acquired Bitcoin in 2020.
By analyzing blockchain indicators from IntoTheBlock, we can corroborate that Bitcoin’s trading volume has been driven by institutional investors and “whales.” Large Transactions — those transferring over $100,000 — act as a valuable proxy to institutional activity on the blockchain. As can be seen from the graph below, the aggregate volume in large transactions has grown exceptionally throughout the year.
While certainly not every large transaction represents an institution buying, the pronounced upward trend in large transactions volume highlights the growth in Bitcoin’s institutional adoption. Similarly, the average transaction on the Bitcoin blockchain has increased from around $20,000 in December 2019 to over $110,000 in December 2020, further evidence that institutional activity has been driving Bitcoin’s bull run.
Bitcoin as a Store of Value
Though some may have doubted Bitcoin’s proposition as a store of value due to its volatility, on-chain indicators suggest that this thesis is stronger than ever. Particularly, the long-term investment horizon observed from Bitcoin investors is pushing the narrative of digital gold forward.
A core characteristic of a store of value is that it is expected to retain its worth rather than depreciate. Despite Bitcoin going through various crashes of over 50%, Bitcoin has sustained an upward trend, recovering every time. This has propelled the practice of “hodling” amongst Bitcoin investors.
IntoTheBlock categorizes as hodlers all addresses that have been holding a crypto-asset for a weighted average time of over one year. Throughout 2020, the number of hodlers has steadily increased, even during March when Bitcoin lost half of its value following the Covid-induced panic.
Increased Utility Through DeFi
Decentralized finance (DeFi) has been one of the fastest growing sectors in 2020. Built on smart contract platforms such as Ethereum, DeFi applications allow anyone to obtain financial services without having to go through a third party or custodian. These applications support use cases from access to credit, to investing and to earning passive returns on deposits similar to traditional savings accounts but with much higher yields.
The aggregate value deposited in DeFi protocols has grown from under $700 million in January to over $15 billion at the time of writing. A large portion of this has come from tokenized versions of Bitcoin, Wrapped BTC (WBTC) and renBTC (RENBTC) being the most popular ones. Through these Bitcoin ERC-20 tokens, Bitcoin holders are able to gain access to these decentralized financial services. For instance, they can take out a loan with WBTC as collateral or use it to provide liquidity to yield farm.
In short, DeFi allows Bitcoin to be used for other financial services beyond trading and investing. This has proven to be a popular use case for Bitcoin as evidenced by the growth in WBTC.
Currently approximately 0.84% of Bitcoin’s circulating supply (worth $3 billion) is locked and represented by tokens on Ethereum. While this may seem small in comparison to Bitcoin’s market cap, WBTC has managed to grow by over 100x in 2020, and it is just getting started...
Bitcoin has consolidated as a legitimate asset in 2020. Several people and institutions that previously had previously dismissed Bitcoin, such as Michael Saylor and JPMorgan, have reversed their stance on the cryptocurrency. This transition has been led by institutional adoption seeking to diversify and gain upside from the digital gold proposition. Bitcoin has also strengthened its proposition as a store of value with nearly 64% of all addresses holding for over one year and growing continuously. Finally, the increased utility from using tokenized Bitcoin in DeFi has increased demand for the cryptocurrency beyond trading.
Overall, these three trends put Bitcoin in a much more solid position than it was in 2017. These forces are expected to continue in 2021 and beyond as the crypto market continues to mature. Though Bitcoin will eventually crash again, it has already surpassed some of the wildest expectations.