January 5, 2021

Chart of the Week: Is the Bitcoin rally sustainable?

by Fathom Consulting.

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Bitcoin has rallied in recent weeks, appreciating by more than 50% against the US dollar in December alone. At the time of writing, it took more than $30,000 US dollars to purchase one Bitcoin. Record low interest rates, a rally in risk assets and news that payments company PayPal would be allowing customers to buy and sell Bitcoin on its platform have all contributed to this rally. But while the blockchain technology is impressive and the decentralised nature of Bitcoin and other cryptocurrencies is appealing to many, there are serious questions about the value of cryptocurrencies including Bitcoin. For a start, the price volatility makes them an unreliable store of value, one of the key characteristics of a conventional currency (although holders certainly will not be complaining about that so long as the value keeps rising). Moreover, the verification processes for cryptocurrency transactions require vast amounts of computing power and electricity; in Bitcoin’s case this service is subsidised by those doing it receiving more Bitcoin. But the amount of Bitcoin they receive for doing it is steadily decreasing and the cost of doing this verification process steadily increasing — there could come a point where this is no longer profitable, and the transaction verification process (and indeed the security of the electronic currency system) is no longer viable.

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