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Why bitcoin's latest surge is different from its 2017 mania

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In this Yahoo Finance Spotlight, Dan Roberts takes a look at the late 2020 bitcoin surge, how it’s different from 2017, and how bitcoin narratives have evolved over time.

Video Transcript

DAN ROBERTS: The price of Bitcoin hit $20,000 for the first time ever on December 15, 2020, 10 years after Bitcoin was first created. Then it jumped from 20,000 to 30,000 in 17 days. Bitcoin rose 296% overall in 2020 and continues to surge in 2021. In the past, a common criticism of Bitcoin from skeptics was that it isn't useful as a real currency. You can't spend it in most places. It doesn't generate revenue, it doesn't give a dividend, so what is its value?

NOURIEL ROUBINI: It's not a means of payment. It's not a single numerator. It's not the stable store of value. Secondly, it's not even an asset. I think we are close to the point in which these hyperbolic bubble is going to go bust.

DAN ROBERTS: But in 2020, many investors decided that doesn't matter, since they now view cryptocurrency as a legitimate asset to have in their portfolios that you wouldn't want to spend anyway. It's the digital gold argument. At the very least, the consensus is now that Bitcoin isn't going away. It has existed for more than 10 years and it will continue to exist. If the late 2017 Bitcoin price surge was driven by crypto newbies buying in without doing their homework on cryptocurrency, the 2020 ride has been driven by institutional buying, individual Wall Street hedge fund investors buying in, and some big consumer facing payments companies like PayPal, Square, and Visa.

The 2020 buying frenzy happened amid the COVID-19 pandemic, when central banks were pumping out stimulus money. A scenario that serves as a reminder of Bitcoin's scarcity and its appeal as a hedge against inflation. But when the pandemic ends, will Bitcoin's bull run end? Wall Street firms pumped $5.75 billion into digital asset funds in 2020, up 660% from 2019. And so much Bitcoin is now held by long-term institutional investors that the blockchain research firm Glassnode estimates just 22% of existing Bitcoin is in circulation for trading. That could be a positive for the price in 2021, but it could also increase price volatility.

Along with the spike in institutional interest, influential Wall Street investors have changed their public tune on Bitcoin. In May, Paul Tudor Jones said that he now has nearly 2% of his portfolio in Bitcoin. He ranked Bitcoin number four on his list of hedges against inflation and he called it a great speculation, arguing that as new cryptocurrency is proliferate, Bitcoin will become even more differentiated as the precious coin.

PAUL TUDOR JONES: It's the first crypto, first mover, in a world that's so compressed. It has that historical integrity within digital currencies that it will always have. So that might, and again, because of its finite supply, that might be the precious crypto.

DAN ROBERTS: PayPal and Square have also been credited with intensifying the 2020 surge. On October 21, 2020, PayPal announced it will soon allow Bitcoin buying inside its PayPal and Venmo digital wallets. Square added Bitcoin buying to its Cash app back in 2018. And in 2020, it also bought $50 million worth of Bitcoin as an asset for its balance sheet. But it wasn't just PayPal and Square. Visa, over the past year, has quietly approved a bunch of Visa-branded Bitcoin credit and debit cards, and it will soon add support for Circle's USDC Stablecoin to its customer network.

All of these examples represent an obvious shift in sentiment in Bitcoin's favor, which is why many inside the crypto space are hoping this time is different from the 2017 price run.