Bitcoin's Limited Supply Boosts Long-Term Asset Stability, Analyst Says

Bitcoin recently soared above $60,000, but the record high doesn't suggest a market top followed by a sharp price decline, one analyst believes.

The key reason: The supply of Bitcoins is limited to 21 million and demand, especially among institutional investors, is strong.

Jason Deane
Jason Deane, Bitcoin Analyst, Quantum Economics, London (Photo Provided) Photo Provided

"Bitcoin's growth can be explained by simple economics," Jason Deane, an analyst at London's Quantum Economics told Newsweek. "Since the supply side of the equation is fixed and demand continues to increase, the result is predictable and obvious."

Deane expressed confidence in the long-term value of the world's top cryptocurrency.

"Should that demand start to wane, the situation may change," he said, "but even so, due to the number of Bitcoin that now appear to be in long-term storage, overall liquidity is not likely to increase significantly."

In mid-day trading Wednesday, Bitcoin changed hands at $55,943.33. It's up 92.17% for the year. The all-time high is $61,556.59, CoinDesk reported.

Investors pursuing a buy-and-hold strategy for Bitcoin reduce the number of coins available for daily trading, driving up the price. Institutional investors long ignored, or even scorned, Bitcoin. But, just like retail investors, Wall Street is subject to FOMO ("Fear Of Missing Out").

The cascade of cash from large investors drove Bitcoin's price up, and it appears to have stabilized the market.

Deane said that MicroStrategy's initial purchase of Bitcoin in August 2020 during the economic downturn caused by the COVID-19 lockdown gave the cryptocurrency credibility and sparked the current bull market.

Tourists pose at a bronze sculpture of a bull, the symbol used by Wall Street for positive times in the market, in New York in January 2008. Chip East/Reuters

PayPal and Visa were already developing Bitcoin-based products, but MicroStrategy's investment caught the eye of other major investors.

Some Wall Street firms now offer Exchange Traded Funds pegged to Bitcoin.

The last Bitcoin bear market ran from February 2018 to July 2020.

Prior to the current run, Bitcoin's high was about $20,000. It fell as low as about $4,000 during the last downturn, and traded in a range of $7,000 to $10,000.

But Deane said the past isn't necessarily prologue because the market and its participants have changed since the last downturn.

"There was no significant underlying or institutional demand chasing the remaining coins," Deane said. "Regulation was still messy and Bitcoin was still considered a rank outsider."

He argued that the cryptocurrency market has changed significantly since then.

"Today's market has substantially different fundamentals," Deane said, "a macroeconomic backdrop that supports the use case and far higher education development and adoption."

But some remain skeptical.

An analyst at Deutsche Bank said Bitcoin's rise can be traced to the "Tinkerbell effect" – its price increases because many investors believe it will continue to go up, making price appreciation more likely.

Economist Dr. Marion Laboure
Economist Dr. Marion Laboure, researcher, Deutsche Bank, who warned in a report of the "Tinkerbell effect" in the market for Bitcoin. (Photo Provided: Deustche Bank) Deustche Bank

Earlier this week, Bobby Lee, founder of the crypto exchange BTCC, told CNBC that he believed Bitcoin's price could go as high as $300,000. But he also warned the Bitcoin bubble could pop.

"People should be aware that it could fall as much as 80% to 90% of its value from the all-time peak," Lee said.

But Armageddon is likely to be averted in the near term as long as Bitcoin is held and sought by major investors.

"It's too early to say Bitcoin has come of age," Deane said, "but it has certainly matured as an asset class from three years ago."

Market Pulse

Drivers are paying an average of $2.88 a gallon for regular unleaded, the American Automobile Association (AAA) reported. Gasoline prices have increased about 30% in the last year, including a 14% jump since February.

Price increases have moderated, but the prospect of a continued economic recovery and a return to summer driving as more people are vaccinated against COVID-19 suggest gasoline may soon average $3 a gallon nationwide.

However, prices have already climbed above $3 in some regions.

The nation's 10 most expensive markets are: California ($3.88), Hawaii ($3.59), Washington ($3.31), Nevada ($3.29), Utah ($3.15), Oregon ($3.15), Alaska ($3.12), Arizona ($3.11), Illinois ($3.07) and Washington, D.C. ($3.05), AAA said.

The nation's lowest prices are in Wisconsin, Illinois, Ohio, Kansas, Missouri, Texas, Louisiana, Mississippi, Alabama, North Carolina and South Carolina, averaging $2.60 to $2.67 a gallon.

Nationwide, supplies are up, and refinery utilization rates have jumped to 76% from 69%.

This doesn't mean gasoline prices have peaked, but suggests the rate of increase will moderate, AAA said. During the worst of the coronavirus pandemic last year, crude oil prices briefly turned negative as demand collapsed.

Keystone XL pipeline pipes
Miles of unused pipe, prepared for the proposed Keystone XL pipeline, sit in a lot on October 14, 2014 outside Gascoyne, North Dakota. President Biden has revoked the permit for the controversial project. Andrew Burton/Getty Images

The price of West Texas Intermediate Crude, the benchmark for U.S. prices, has rebounded this year and recently fetched $60.84 a barrel, up $3.07, or 5.32%.

Increased demand is good news for oil stocks, which generally track the ups and downs of the nation's economy. Some oil stocks fell as much as 35% in 2020. Many analysts expect the sector to rebound about 15% this year.

But the energy sector is volatile, and new restrictions imposed by the Biden administration, including a halt to the issuance of new oil and gas leases on Federal land, as well as revocation of the permit for the Keystone XL Pipeline, may crimp supply.

If demand remains strong, that may mean still higher prices at the pump.