During the last bull run, many analysts were convinced that Bitcoin’s value would not exceed $10,000 before it crashed down from a crypto market correction. But the crypto explosion of 2021 proved otherwise when huge players began having plans to accept it as direct payment in exchange for certain goods and services.
The real question is: Why was there a sudden rally at the start of this year? As a digital payment method, decentralized currency is still in its infancy, and has yet to flourish outside of a few niche eCommerce spaces. So far, it has the shortest trading history out of all the financial assets including stocks and bonds.
While Bitcoin was the first of its kind–derived from a computing network called blockchain, a system not controlled by any individual participant or company, it’s real value is harder to predict with prices being so volatile not to mention a lack of integration into consumer transactions.
Key reasons for the new surge across Bitcoin and altcoins
There has been a growing demand from a fair number of institutional investors who see Bitcoin as a means to protect their assets against the effects of inflation which continue to devalue the fiat US dollar. To prevent that from happening, it has limited the supply in circulation to only $21 million coins.
Other altcoins may follow the same path by developing smart contracts and releasing coins in increments based on how many blocks were mined by users. To some extent, trading platforms such as Binance are already making them accessible to new traders, offering attractive buy-ins for digital wallet holders.
Fear of missing out is what drives most retail investors who jump on board the bandwagon. While speculating carries a lot of risk, many cannot resist grabbing their share of the pie, no matter how much it shrinks once the bear market hits. Since the gov’t issued another round of stimulus checks, people have been spending it on their crypto wallets after fulfilling their basic needs.
So how did Bitcoin break through the $50K ceiling? No doubt, there were many bullish crypto advocates who expected prices over $100K. But this time, the prime motivator for crypto buying is not supply and demand alone. It was likely caused by Elon Musk’s decision to purchase $1.5 billion of Bitcoin, followed by other corporate investors that prompted the surge in price.
These big-name investors are staking their fortunes on the store of value of cryptocurrency, not as much on its ability to facilitate retail purchases. Although Bitcoin and Ethereum are too expensive for buying everyday items, they can substitute for a good bank account. The lack of regulations and speculative nature of digital currency are both responsible for pushing up the price.
One could argue that it is demand from new investors that drive the value of crypto through the roof rather than an increase in participation on the blockchain network. This is amplified by large-scale institutional buyers whose only goal is to hold the money for future profits with little desire to spend it back into the economy.
DeFi chain technology opens up additional investing opportunities
The introduction of DeFi tokens is another factor that contributed to the crypto trends in 2021. For those who don’t know, DeFi stands for decentralized finance, a term inspired by blockchain’s ability to store multiple transaction histories instead of sending them through a central banking system.
DeFi is focused on expanding the use case of cryptocurrencies into other areas such as insurance, crowdfunding, and borrowing loans. In fact, one of the main advantages of using DeFi currency is the option to cut out the middleman on different types of transactions. It aims to outpace traditional banks in speed and performance, giving users more control over their wallets.
Notice how many DeFi tokens are powered by the Ethereum blockchain? This leads to a greater number of applications being built to fulfill complex financial needs, which helps distinguish it from Bitcoin. The platform will automatically execute smart contracts without any input from the user. This holds true when certain rules set by users are being followed.
This flexibility allows DeFi to support all kinds of practical use cases:
- Trade exchanges where one currency is instantly converted into another
- The option to tie cryptocurrency to assets like the dollar or other stable coins
- Lending apps that provide smart contracts to reduce bureaucratic delays
- Establish new markets for betting on the outcome of recent events
- Users voting on decentralized protocols in the form of governance tokens
- Yield farming and liquidity mining which will be further discussed below
What you need to know about liquidity mining
As new concepts arise from DeFi exchanges, liquidity mining is one that has attracted the attention of experienced traders. It presents a way to earn passive income for those who don’t mind facing market volatility. Also known as yield farming, it delivers liquidity to assets stored in decentralized exchanges.
Everyone gets a share of the profits from the developers to the day traders. To give you a better overview, liquidity mining creates a system where rewards are distributed to participants who stake their coins to keep the blockchain network going. It became quite popular after the release of Uniswap and Compound, though this idea originated from the Chainlink protocol.
Soon enough, liquidity mining brought tons of capital to decentralized exchanges, enabling users to stake their coins in hopes of receiving a fraction of the rewards. DeFi is regulated using smart contracts where every user gets to vote on policies that best serve their trading interests.
On these platforms, investors can swap tokens drawn from a liquidity pool, assuming they are willing to pay a gas fee. In return, they have the right to trade as much as they want and in practically any amount. Liquidity mining directly converts one coin into another, perfect for trading altcoins with less mainstream presence.
Is now really a good time to invest in the crypto boom?
As of late, Bitcoin has climbed to an all-time high of $60,000 USD per coin. This resulted in the price of Bitcoin, Ethereum, and many altcoins skyrocketing to the moon. Soon enough, retail investors followed suit, eager to trade off their portfolios on Coinbase and other exchanges. Trading activity has grown to reflect newfound interest in staking coins as a long-term strategy.
If you’re an investor, you’ve probably heard of Chainlink, Litecoin, Aave, Uniswap, Polkadot, and even the infamous Dogecoin, though some only exist as a joke whereas others are backed by sound fundamentals. A fine example would be Polkadot, an open-source project capable of transferring data across separate blockchains–in other words, a way for blockchains to communicate.
Most coins have yet to meet their designated market capacity, therefore it’s not too late to invest in a diverse portfolio of altcoins if Bitcoin seems out of reach right now. In order to mitigate risks, you can always consider dollar cost averaging as the way to go. Basically, don’t try to time the market when it mostly comes down to luck.
That being said, unexpected price swings in either direction are quite common because of the “pump and dump” mentality among day traders. It does show a near identical trend to the dot com bubble of the 90s as Bitcoin prices rose sharply but fell back down, losing nearly 90% of its original value.
Then again, it is up to individual traders to decide how much risk they are willing to take in hopes of winning this digital gold rush.
