Analysis of the rationale behind the Bitcoin rally

The current Bitcoin rally is based on much more solid foundations than in 2017, when there were much more hype than foundations

Analysis of the rationale behind the BitcoinANÁLISE rally

Bitcoin has surpassed the long-awaited $20,000 mark. After flirting with this price in December 2017 and last month, Bitcoin finally reached this milestone. After the recent price hike, Bitcoin is now 217% more valued.

This raises the question: why is Bitcoin going up? And is this time really different from 2017? Comparing bull races in 2017 and 2020, in addition to reaching the all-time high (ATH) in the same month, these rallies are very different aspects from a fundamental perspective.

Analysing the data one can extract valuable data to answer these questions.

A more secure network: the Bitcoin hash rate has increased almost tenfold since 2017
An important aspect of the 2020 vs. 2017 rally is the hash rate. The hash rate – which measures the aggregate power that miners devote to solving the Bitcoin proof-of-work algorithm – has reached high levels throughout 2020.

And why is that important? The hash rate of a blockchain is often associated with its safety. This is the case because more computing power allocated to validate transactions makes it more expensive to try to attack the blockchain. Therefore, increases in the hash rate can be interpreted as improvements in the security of the underlying blockchain network.

As can be seen from the graph above, the Bitcoin rate has grown steadily over time, specifically from 13.66 TH/s in December 2017 to 133.66 TH/s in December 2020.

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The prevalence of Bitcoin as a store of value
Bitcoin (BTC) as „digital gold“ is a narrative that we have heard for several years. Although Bitcoin is known for its high volatility, on-chain analysis suggests that this thesis is stronger than ever.

The prevalence of long-term investment in Bitcoin manifests its transition to a reserve of valuable assets. At the time of writing, more than 64% of Bitcoin addresses have had it for over a year. The growth in the net number of Bitcoin holders (the famous hodlers), together with the relative increase in the percentage of hodlers, point to the proposition of strengthening Bitcoin as a value reserve.

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Institutional Adoption has grown and consolidated
A major factor in the recent upward trend has been the increase in institutional investment. Although this trend started a long time ago, 2020 was the year when the institutional adoption of Bitcoin finally took off.

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This was evidenced by the support of large traditional financial companies such as Microstrategy, Blackrock, JPMorgan and Fidelity, FinTech’s such as Square and PayPal, and renowned macro investors such as Paul Tudor Jones and Stanley Druckenmiller. More recently, even S&P Dow Jones Indices has announced that it will launch cryptomore-currency indices in 2021, which are expected to continue to feed the market share of financial institutions.

Following this trend, the large transactions in the Bitcoin network have shown remarkable growth and volume.

The IntoTheBlock large transaction indicator serves as a means of counterparty analysis. By tracking transactions over $100,000, it acts as a valuable proxy for analyzing institutional activity. As can be seen in the graph above, the aggregate volume in large transactions has grown exceptionally over the year.

Similarly, the average transaction size indicator measures the average transaction value on any given day. This indicator provides an idea of what type of activity is happening in the blockchain and what type of users are making transactions with this specific crypto.

The above graph shows the growth in institutional investment as the average size of transactions in Bitcoin increased from about US$20,000 in December 2019 to more than US$110,000 in December this year.