Like a phoenix rising from the ashes, Bitcoin has broken out of its bear-market slump in a big way.
After falling more than 80% from the highs it reached in December 2017, the world's most valuable cryptocurrency has rallied back sharply in recent months. From its lows near $3,000 in December 2018, Bitcoin has clawed back nearly half of its losses and is once again trading above $10,000.
Skeptics would argue that Bitcoin's price, like those of many cryptocurrencies, is manipulated. Research from Bitwise Asset Management supports this view. A staggering 95% of Bitcoin trading volume is fraudulent, according to a recent study by the blockchain-focused investment firm.
Moreover, many crypto industry watchers believe that Bitcoin's price is being artificially inflated by Tether, the controversial stablecoin issuer that's under investigation by the New York Attorney General's office for allegations of possible fraud. With Tether issuance coinciding closely with Bitcoin's recent gains, it's understandable that many bears are questioning whether the cryptocurrency's price appreciation is largely fake and due for a serious correction. This is a risk that even ardent Bitcoin bulls should factor into their investment decisions.
But there are some other possible reasons why Bitcoin's price is rallying -- and why it could continue to rise to new highs in the months ahead. Here are three of them.
Image source: Getty Images.
Facebook's blockbuster announcement
The excitement surrounding Facebook's (NASDAQ: FB) new Libra digital token is likely contributing to Bitcoin's gains. The social media titan announced on June 18 its plans to create a new global currency.
Facebook's blockchain-based digital token is to be called Libra. It's designed to serve as a stable medium of exchange for billions of people around the world. Like Tether, Libra is to follow the model of a stablecoin, a low-volatility cryptocurrency whose value is backed by real assets such as fiat currencies. Yet unlike Tether -- which has admitted that its tokens are only partially backed by its cash reserves -- Libra will be backed completely by bank deposits and short-term government securities.
Libra is designed to enable fast and low-fee money transfers on Facebook's network of apps. And thanks to Facebook's thriving base of more than 2 billion users, Libra is expected to quickly become one of the most-used digital currencies.
So how does this benefit Bitcoin, you ask? Well, by introducing the concept of digital currencies to billions of people, Facebook is raising awareness for the cryptocurrency market as a whole. And once people become familiar with purchasing digital currencies like Libra, it's a short step to buying other cryptocurrencies like Bitcoin.
In essence, Libra stands to serve as a major new on-ramp for millions of new crypto users. This increased demand could boost the price of Bitcoin -- and traders are likely already bidding up the cryptocurrency's price in anticipation of Libra's launch.
Institutional investors may be entering the arena
Whether the catalyst is Facebook's coming Libra launch or something else, signs are mounting that institutional investors are beginning to dip their toes into the crypto waters.
CME Group (NASDAQ: CME) is enjoying record volumes for its Bitcoin futures contracts -- binding agreements that allow people to make bets on whether the cryptocurrency's price will rise or fall over a certain period of time. These contracts also help investors hedge their positions, making them a popular tool among professional investors.
Additionally, Fidelity Investments, which manages more than $7 trillion in assets, is gearing up to offer Bitcoin trading services to its institutional customers, according to Bloomberg. A recent survey by Fidelity showed that 22% of institutional investors already have some exposure to digital assets, while 40% say they are open to investing in the asset class over the next five years. Furthermore, 47% of the more than 400 institutional investors surveyed -- including hedge funds, family offices, pension funds, university endowments, and financial advisors -- view digital assets as having a place in their investment portfolios.
Institutional investors manage trillions of dollars' worth of capital. If even just a tiny fraction of these assets begins to flow into the crypto markets, the price of Bitcoin and other cryptocurrencies could soar.
The crypto world lives on hope and is fueled by excitement. That means new highs can beget more new highs, as FOMO (fear of missing out) drives more investors into the marketplace.
In this regard, $10,000 is a key psychological threshold for investors. With Bitcoin breaking back above this price in recent days, news headlines (like the one for this article!) will be flashing onto investors' screens to mark the occasion. Bitcoin will once again be a key topic on financial media shows, and astronomical price predictions will again be passed around.
All of this helps to fuel Bitcoin's fire. These factors could drive the popular cryptocurrency to new highs above $20,000 in the coming months -- or even days.
That is, of course, if it doesn't crash before then.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends CME Group and Facebook. The Motley Fool has no position in any of cryptocurrencies mentioned. The Motley Fool has a disclosure policy.