Not a day goes by without Bitcoin holding headlines. This time, it dropped over 20% at the start of the trading week, as it was strongly rejected from the $40,000 level.
Naturally, such a fast decline spurred various reactions from the financial community. Bears, otherwise silent during the 2020 winter holidays parabolic rise in the price of Bitcoin, suddenly found their voice. Bulls planning to buy the dip just saw their opportunity – the market offered them a chance to go in at a 20% discount. What remains at the end of such violent crashes and subsequent price recovery is the feeling that the market is yet to mature.
Corporate Cash Fueling the Bitcoin Rally
By the time Bitcoin crossed the $35,000, it was already up 20% in 2020 alone, although the year started only for a few days. In the meantime, it rose to $40,000 before correcting again.
More and more corporations diversify some of their treasury assets into cryptocurrencies. Naturally, that led to higher prices as Bitcoin is a scarce asset.
Lack of Regulation, Risk of Price Manipulation, Environmental Disaster
One explanation for the pump and dump is that the price of Bitcoin is manipulated. Today, in a speech in which she mentioned Bitcoin and central bank digital currencies, Christine Lagarde, the President of the European Central Bank, said that Bitcoin needs regulation.
Critics argue that Bitcoin’s enormous energy consumption is not sustainable over time and that it dampens the green efforts made by governments. Let us not forget that fossil fuels remain the global energy consumption by source – 84% in 2019. Effectively, it means that humankind produces electricity from things like oil, coal, gas – all of which are major CO2 pollutants. Therefore, the world fights a race against the clock to shift from fossil fuels to low carbon sources.
Because Bitcoin consumed 120 GW (gigawatts)/second, it is enough to power a nation’s electricity grid for a population of over 200 million. Such numbers led to some analysts saying that Bitcoin’s true value is negative, not even zero, given the massive polluting externalities of the mining process.
Is Bitcoin a bubble?
According to legendary investor George Soros, a bubble is defined by two components – one is a trend, and the other one is the misconception about the trend. If Bitcoin is a bubble, it has all the characteristics to be the “mother-of-all” bubbles.