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Bitcoin is the serial bubble that refuses to die. On December 17, Bitcoin (BTC) broke through its all-time high and has since risen by more than 50% and is still surging. Can global political and economic factors explain this surge?

Background

Bitcoin is a digital currency created by an anonymous person in 2008 in response to the financial crisis. It was motivated by the currency manipulation of central banks and decades of irresponsible inflationary monetary policies worldwide. The purpose of bitcoin was to create inflation and fraud-proof electronic money that could not be controlled by any government.

In 2010, the first documented real-world purchase with Bitcoin was conducted: 10,000 BTC were used to buy a pizza. January 6, 2021, those same Bitcoins were worth more than $340 million.

Bubbles

Everyone tends to agree that Bitcoin is prone to being a bubble. Quite early, it experienced a price crash of more than 90%. Unlike other bubble assets, however, it recovered. It has since gone through at least five boom-bust cycles, each time with new all-time highs. Based on previous cycles, BTC may surpass $100,000 before it crashes again.

Political Implications

Bitcoin seems to surge every time politicians create trouble globally, which appears to be quite often. This time, governments worldwide have plunged the economy into a self-inflicted recession with lockdowns in response to COVID-19.

By printing money to pay for stimulus and relief packages, they are devaluing the money. Consequently, the stock markets and gold are at record levels, and as the most volatile of all assets, Bitcoin is surging.

Although such increases in your stock portfolio are beneficial to your retirement fund, it is a fundamental weakness of the economy, which amounts to a wealth transfer from ordinary people to the ultra-wealthy who know how to maneuver in the financial markets.

Why Volatile?

bitcoin and goldWhy does Bitcoin experience such wild fluctuations in value compared to gold and other assets? First, it is a young asset currently only used for speculation, not as a means of exchange that would stabilize it.

Second, BTC currently has a total market capitalization of around 600 billion dollars, only 6% of gold’s total value. Therefore, a relatively small influx of money into the market can fuel a massive price rise. The current boom is created by an increase in the daily trade volume of merely $50 billion.

When Bitcoin matches gold in market capitalization, the odds are that it will be far more stable than it is today. If that scenario plays out, Bitcoin could become a form of digital gold used both for wealth storage and payment.

Political Indicator

For now, Bitcoin should be viewed as an indicator of distrust in political institutions. Amazingly, it has become a way to monetize political instability.

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Read more from Onar Åm.

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