On Aug. 23, Bitcoin (BTC -1.64%) briefly passed the $50,000 mark for the first time since May. Although it's still down over 20% from its all-time high, Bitcoin has now rallied over 50% from the recent low it hit in July. Ethereum (ETH -2.68%), the second-largest cryptocurrency by market cap, has done even better, shooting up about 90% in the same period. This trading illustrates how Bitcoin and Ethereum remain extremely volatile, and there's no telling what they will do over the short term.
Zoom out over a timeframe of a few years, however, and Bitcoin's success and growth trajectory become clearer. Here are three simple reasons why Bitcoin has more room to run.
Image source: Getty Images.
1. Institutional adoption
The catalyst that has been driving Bitcoin's shift from unconventional markets to the mainstream is institutional adoption -- which is just a fancy way of saying large companies are entering the cryptocurrency space. Their involvement comes in the form of accepting Bitcoin as payment, holding Bitcoin as an asset, trading Bitcoin, creating financial products centered around Bitcoin, and more. Demand rises as more organizations become interested in this space.
As a result, the cryptocurrency market has changed a lot over the last few years. Today, it's dominated by larger players. In July, leading U.S. cryptocurrency exchange Coinbase Global (COIN -4.18%) released its first-half 2021 institutional report. The report found "an increasing share of our clients now consider BTC to be a mainstay in their long-term portfolios and an emergent store of wealth that competes with gold. [...] BTC stored $657 billion in global wealth at the end of H1 as institutional investors such as traditional hedge funds, endowments, and corporates increased their exposure over the period."
Order volumes support this statement. Coinbase's institutional trading volumes made up 68.6% of its total second-quarter volume compared to just 64.1% in the previous quarter and 60.7% in the year-ago period. Coinbase also found Ethereum and other cryptocurrency assets are beginning to make up a larger portion of total trading volumes. In the second quarter, Coinbase fetched higher Ethereum trading volumes than Bitcoin for the first time in its history as decentralized finance and non-fungible tokens gain popularity. In sum, big money is flooding into cryptocurrency.
2. More financial products and improved accessibility
User-friendly apps, sophisticated reporting, and detailed tax accounting are making it easier for folks like you and me to buy cryptocurrency. Depending on the track record and security of the exchange, investors can now earn sizable interest on Bitcoin, Ethereum, alternative coins, and stablecoins.
Similar to a bank, exchanges like Coinbase will pay retail investors an interest rate that is lower than what the company thinks it can make by lending that asset out. Given the demand for large-scale trading, that interest rate is comparably higher than your typical U.S. savings account. It's a win-win situation, because the exchange gets to lend your asset as collateral in return for a market-beating and relatively safe interest rate.
Similar to stocks, cryptocurrency assets have different risk profiles that can suit a particular investor's preference -- adding yet another layer of sophistication to the space. Speculative investors can now buy alternative coins like Polygon, Cardano, or Chainlink from a variety of exchanges, many of which pay interest.
3. Better investor protection
At its core, regulation is intended to provide market participants with basic protections while creating a fair marketplace. There's a lot of talk about the dangers of regulation, specifically the SEC stepping in and monitoring cryptocurrency exchanges. However, it's clear leaders of some of the largest cryptocurrency companies actually support regulation.
"I think we've always welcomed sensible regulation in this space," said Coinbase CEO Brian Armstrong during the company's second-quarter conference call. "We basically just want to be treated on a level playing field with any other traditional financial services companies out there."
Zac Prince, CEO of BlockFi, said the following in a blog post on July 28:
From when Flori and I started BlockFi, we have had ongoing discussions with regulators as cryptocurrency is a new area for many and we knew there would be questions. We've said time and again that the key to our industry's success is appropriate regulation. Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem.
Regulation has the potential to lend legitimacy to the cryptocurrency market. As we've seen with institutional adoption and the advent of new financial products, Bitcoin gaining traction across different industries tends to be a good thing for this market.
Heating up
The stigma around Bitcoin and other cryptocurrency assets typically stems from the idea they're hard to understand, or the market is opaque. Despite all of the advancements discussed, this stigma remains a barrier to entry for many investors.
Regulation may complicate the cryptocurrency market in some ways and make it less profitable for some players, but it could also add a layer of trust for retail investors and institutions. Transparency, whether it comes from regulation, easier-to-use financial products, or better tax documentation, is critical for Bitcoin's future as a financial asset. The price of Bitcoin can whipsaw all it wants in the short term. But over the long term, it's easy to see Bitcoin's rich potential as the market becomes more mature.
