Bitcoin has drawn the attention of millions of investors, speculators, and consumers across the globe. The cryptocurrency has seen huge gains since its birth more than a decade ago, but there's also been plenty of volatility along the way. After reaching nearly $20,000 back in late 2017, bitcoin suffered yet another drop of more than 80% to fall below $3,500 by early 2019. Yet in just the past year, the crypto token has bounced back yet again.
Over the past weekend, bitcoin climbed back through the $10,000 level. It was the first time since last summer that bitcoin had been that high, but more importantly, it showed that interest in the cryptocurrency remains stable even amid all the volatility. Below, we'll look at some reasons why bitcoin has been strong lately -- and whether this'll be the time it can avoid major declines and stay above that mark for good.
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The psychology of bitcoin
One reason why bitcoin has done so well lately is that investor interest is feeding off the crypto token's strong gains in 2019. Bitcoin prices soared 85% last year, going from below $4,000 to start out 2019 to around $7,200 at year-end. Moreover, bitcoin climbed as high as $12,500 at times during the summer months before falling back, showing that it could still fetch respect from investors and speculators.
As financial markets generally got off to a good start in 2020, inflows into cryptocurrencies were especially robust. A rise of 35% in less than six weeks shows just how volatile bitcoin can be on the upside as well as the downside. Fear of missing out led new investors to jump onto the crypto bandwagon, building further momentum.
Now, the question is whether cracking the psychologically notable $10,000 mark will prove to be the end of the 2020 rally or the beginning of a longer recovery back toward bitcoin's all-time highs closer to $20,000.
Why bitcoin could see further gains
To many, the bitcoin market just seems like an exercise in trading. But when you look at the structure of the cryptocurrency itself, there are a few fundamental aspects of bitcoin that sometimes have an influence on its price.
One of those catalysts is coming up later this year. You can still obtain bitcoin through mining -- solving complex mathematical problems and receiving rewards for the solutions. However, the amount of bitcoin you receive for providing those solutions is scheduled to drop in May. At that point, new blocks will consist of just 6.25 bitcoin tokens -- down from 12.5 bitcoin tokens currently.
The last time the size of these reward blocks got cut in half was four years ago, and that was a strong year for those tracking the price of bitcoin. The common-sense explanation is pretty simple: If it takes twice as much effort to obtain bitcoin through mining operations, then the value of existing bitcoin available on the open market should roughly double in response. Combine that with plans to make bitcoin faster and with the rise of new apps and other interest in the cryptocurrency, and prices could continue to rise throughout the year.
The other side of the bitcoin
Yet there are also dangers for bitcoin in the coming year. Those who specialize in mining bitcoin will suddenly have to deal with their revenue getting cut in half when the size of reward blocks drops. That could make some high-cost bitcoin miners no longer profitable. Although most mining operations can deal with losses for a short period while they boost efficiency, speculators can take the opportunity to try to push bitcoin's price even lower in an effort to put miners into further financial difficulty.
In addition, bitcoin still faces challenges to mainstream adoption. Past incidents in which investors have lost cryptocurrency assets as a result of crypto exchange failures and other problems make many people reluctant to invest in bitcoin, even through investment vehicles like Grayscale Bitcoin Trust (OTC: GBTC). Although it's getting easier to use bitcoin for regular purchases, it's still far from ubiquitous.
Here to stay
Perhaps the most telling aspect of bitcoin is that no matter how much it looks like it's gone for good, it has always managed to bounce back somehow and get back into the spotlight. That's no guarantee that the same thing will happen this time around, but I wouldn't bet against bitcoin's prospects for the long run even with its drawbacks.
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Dan Caplinger has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.
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