2020 will definitely be a year long remembered by investors. The growing pandemic and all the restrictions in the major world economies that followed had a colossal effect on almost all asset classes. And this, of course, has pushed investors to look for new alternatives in the safe-haven assets - instruments that have the potential to protect investment portfolios in times of financial uncertainty. Well-known examples of safe-haven assets are gold, silver, government bonds, and their varieties.
Contrary to many critics' expectations, however, one of the best-performing financial instruments in this volatile year is bitcoin. Even more - the cryptocurrency performed significantly better than all safe-haven assets time-tested over the years.
One of the main criticisms of the digital currency was the fact that it had not undergone periods of more serious crises and it was not clear how these events would affect its price.
But 2020 was a good test that many analysts would describe as successful. It was the good performance of bitcoin that made it even more attractive to investors, who began to call it "digital gold". The question we all ask ourselves at the moment is "what's next?"
Bitcoin is the most popular and traded cryptocurrency at the moment. It was established in 2008 but began to gain popularity in 2015 as a highly volatile instrument that can serve as a medium of exchange and store value over time. Then, for the first time, speculation arose about its future usefulness and imposition as a universal means of payment. The limited final number of 21 million bitcoins is the main thesis about the possibility of storing value over time and this is the most attractive feature for crypto investors. Currently, about 90% of all 21 million bitcoins have been "excavated".
On the other hand, according to most critics of bitcoin, it has almost no intrinsic value because it is not a physical asset and its use as a medium of exchange is limited.
Compared to ordinary national currencies, the technology behind bitcoin and its acquisition for transactions continue to be more complex for most users. But statistics show that interest in global investment in crypto wallets and blockchain technologies is increasing.
The popularity of bitcoin has increased significantly in 2020, as cryptocurrency is among the best-performing financial instruments during the global pandemic.
On November 18, the price managed to cross the psychological limit of $18,000, and many analysts predict that the cryptocurrency is about to test the highest value of $19,469, which was reached in late 2017.
The global measures against coronavirus in March 2020 led to sell-offs in the financial markets. As a result, we have witnessed unprecedented measures by central banks and governments to support economies. Stock market indices offset the declines of March, and this had a positive effect on the crypto market. From mid-March until today, bitcoin has risen by more than 320% - an increase that significantly exceeded the performance of leading stock indices.
To get an even better idea of the overall performance compared to other asset classes, we can compare the results bitcoin has with those of the two benchmarks in periods of economic growth and uncertainty - S&P500 and gold.
The chart shows that the price changes in both directions of the cryptocurrency during these two periods are significantly larger than the changes in the S&P500 and gold. Impressive is the large increase from March to today, due to various factors, one of which is the aggressive incentive policy.
The demand for gold, on the other hand, is tied to the reserves of central banks, investment demand, and not a small part for the production of electronics, components, jewelry. In bitcoin, the largest share is occupied by speculative demand for profit from larger price changes and a significantly smaller share falls on the demand for value transfer from one person to another.
Gold is one of the main safe-haven assets, while for most market participants the digital currency continues to be a highly volatile and riskier asset. The two instruments are different and it should not be forgotten that cryptocurrency cannot completely replace gold as a valuable physical asset, as it is not a tangible one. However, the bitcoin performance this year reveals its potential to provide additional protection in times of uncertainty and even as a speculative tool from which investors can profit in times of uncertainty.
The chart below shows the daily volatility of the S&P500, gold, and bitcoin in 2020.
Source: Yahoo finance
It can be seen that the volatility of bitcoin is significantly higher than that of the S&P500 and gold. Various reasons affect the volatility and price of the cryptocurrency, but the main one is that liquidity in the digital currency is significantly lower. With low liquidity, higher volumes of purchases and sales lead to larger changes in prices, which in practice increases volatility.
Bitcoin supply and demand are most affected by political risks, regulatory constraints, and attempts to manage and control the crypto market in the future.
The fact that more and more companies are looking the digital currency also has a serious and positive impact on its price. One of them is Square, which bought bitcoins for nearly $50 million this October, MicroStrategy acquired $240 million worth of bitcoins, and Fidelity founded a bitcoin-fund in August that focused entirely on bitcoin trading.
To these factors can be added the increase in the number of cryptocurrency exchanges, as well as the desire of many international companies to develop their own digital currency or to participate in a joint project to develop such. The adoption of bitcoin by companies dealing with payment systems such as PayPal is another major step in the development of bitcoin and increased its value by more than 8% after the company's statement.
On the other hand, the smaller market cap of bitcoin (just over $ 200 billion) suggests that the market is too small compared to other major asset classes for large investors who manage a significant amount of capital. The logical connection shows that increasing the market cap of bitcoin will have the potential to make it more accessible to these investors. And this has the potential to lead to an even greater increase in its demand, especially after its good performance this year.
The fixed final number of units makes the new supply predictable. This makes market valuation a key measure of value, as no sharp increase in supply is expected as a result of the emergence of new units because of so-called 'digging'.
BenchMark offers cryptocurrency trading as a contract for difference (CFD). This is a regulated financial instrument that follows 1:1 the price of the real underlying asset and is not traded on the stock exchange. When CFD transactions are concluded, the real asset is not acquired, but only traded (speculated) with its price. Therefore, when cryptocurrencies such as CFDs are traded, there is no risk of them being stolen or lost.
Another advantage is that cryptocurrencies such as CFDs provide an opportunity to achieve results both in appreciation (through purchases) and in depreciation (through short sales).
Cryptocurrency trading is offered in the MetaTrader 5 platform. BenchMark provides you with the opportunity to trade cryptocurrencies without commissions and at a margin, which allows multiplication of the exposure in cryptocurrencies up to 10 times.
|Code in MetaTrader 5||BTCUSD|
|Min. trading volume||0.01 lot|
|Hedging without margin||YES|
|Stop/Limit orders restrictions||NO|
|Expert Advisors||YES, without restrictions|
|Real-time quotes||YES, completely free|
This publication is not prepared according to the rules for preparation of investment research. The information provided is not and should not be considered as a recommendation, advice, investment research or investment decision consultation, recommendation to follow a particular investment strategy or be taken as a guarantee for future performance. BenchMark uses public sources of information and is not responsible for the accuracy and completeness of the information, as well as for the period of its relevance after the publication of the analysis or strategy. Trading with financial instruments carries risk and can lead to both profits and losses.