Over the past 11 months, Bitcoin (BTC -1.29%) investors have taken a beating. At one point this year, Bitcoin was down more than 50% from its all-time high of $126,000 in October. Even with a recent mini-rally in August, Bitcoin is still down 38%.
However, investor sentiment toward Bitcoin has changed dramatically in just the past two weeks. The world's most popular cryptocurrency might have finally bottomed. Here's why.
Reasons to be bullish about Bitcoin
Most importantly, momentum appears to be building for the final passage of the Digital Asset Market Clarity Act ("Clarity Act"). In mid-August, top crypto executives met at the White House, and President Trump gave his full backing to the new legislation. This legislation will remove many regulatory gray areas surrounding Bitcoin, making it easier for investors to hold it in their portfolios.
In addition, the investment thesis of Bitcoin as "digital gold" appears to be returning. For much of the summer, Bitcoin traded like a high-beta tech stock. But the correlation with gold is building, and a major reason is the $40 trillion U.S. debt load and related questions about the overall health of the U.S. economy.
Image source: Getty Images.
Bitcoin has always presented itself as a superior alternative to fiat currencies, which tend to lose their value over time due to inflation. So if the U.S. government is forced to print more money to pay down its massive $40 trillion debt, that's only going to move more investors into Bitcoin via the so-called "debasement trade."
At the same time, Bitcoin treasury companies appear to be buying Bitcoin again. After a nearly two-month hiatus, Strategy (MSTR -0.73%) just announced a major Bitcoin buy. The company, which was dealing with billions of dollars of unrealized losses on its Bitcoin holdings, now has a $1.4 billion paper gain on those same holdings.
And, finally, spot Bitcoin ETF inflows are returning. All it took was a single spectacular month. In August, Bitcoin was up 25%. That's particularly noteworthy, given that Bitcoin has historically been a weak performer during August. The last time Bitcoin performed this well was in 2017, when it went on to post a 1,336% return for the year.
What could possibly go wrong?
Plenty of investors still think there might be one last final downturn before Bitcoin recovers. According to online prediction markets, there's still a 26% chance that Bitcoin drops below $55,000, a 15% chance that it dips below $45,000, and an 11% chance that it dips below $40,000.
CRYPTO: BTC
Key Data Points
There are several scenarios that could cause this. For example, Congress might decide to give up on the Clarity Act and focus on midterm elections instead. Or hostilities might flare up again in the Middle East, leading investors to give up on "digital gold" and focus on physical gold instead.
That being said, Bitcoin likely hit a bottom in August. If all goes according to plan, Bitcoin could be on a trajectory to hit $100,000 by the end of the year.
