Bitcoin (BTC) Price Is Up Almost 40% in the Past Six Months, and It Might Be Going Even Higher Soon

Bitcoin’s (BTC -1.00%) price is up almost 40% in the past six months, and it might be going even higher soon. This trend isn’t simply random fluctuation in the asset’s price. There are at least three things that are driving the coin’s surge. All are likely to continue, so let’s take a look at each.

Many investors like to think that an asset’s value is determined by its fundamental attributes rather than the flighty emotions of our fellow investors. It’s a nice idea, and it underpins all financial models. But it’s bogus, especially when it comes to a high-profile asset like Bitcoin.

Reflexivity is a finance theory that describes how an asset’s price and its fundamentals co-influence each other in a feedback loop: Investor beliefs move price, price movement alters fundamentals, and the altered fundamentals then validate or undermine the original beliefs, often amplifying the cycle. This loop works the most durably when the fundamental attributes of the investment are solid, otherwise the process would be a bit too close to a Ponzi scheme, which would deter investors rather than attracting them.

Bitcoin is reflexivity exemplified, largely because like all crypto it doesn’t have fundamentals for use in traditional valuation models. Instead, belief lifts its price, price attracts believers, they hold out and hope for even higher prices, and the self-fulfilling cycle continues. So one of the biggest reasons that Bitcoin is surging right now is that it was surging before. And one of the biggest reasons that it will continue to surge in the near term is that it’s surging now.

Be aware that reflexivity works in reverse, too. The right sequence of bad economic catalysts or new regulations could send Bitcoin’s price cratering, and on a long enough timeline, it will happen at some point. That doesn't detract from the coin's long-term investment thesis, but it's a reason to purchase with caution when prices are rising rapidly.

Now is the heyday of global governmental Bitcoin policy.

The Trump administration recently issued an executive order calling for the creation of a Strategic Bitcoin Reserve. Although it isn’t yet implemented and hasn’t been connected to any operational mechanics for doing so, if it is implemented as envisioned, it will make the U.S. into a major holder of Bitcoin simply by virtue of it being mandated to retain coins it obtains via asset forfeitures. And that will have a direct impact on the coin’s price over time, as it will mean that more and more supply will be held off of the market for an indefinite period, or at least until a new administration changes the policy.

Other nations like the Czech Republic, Russia, and Japan are studying, discussing, and considering implementing similar policies. Even if none of them do in the next couple of years, others are sure to follow in at least thinking about the issue, and some might end up doing it eventually.

Major players like China have yet to announce any changes to their plans, but have openly held discussions about what new policies might look like. Therefore many investors have started to interpret those possible (though not at all guaranteed) future policy changes as being powerful catalysts that are worthy of front-running by buying more Bitcoin now. It’s harder to envision an anti-crypto government in China today than it was just a few years ago.

In short, the long winter of governments trying to ban Bitcoin and other cryptocurrencies is ending. That’s attracting a lot of institutional investors and other large buyers, as they’re keen to invest in an asset that’s seeing its largest single risk wither away, and it’s convincing smaller investors to buy in for the same reason.

On April 28, the Bitcoin treasury company Strategy announced that it had bought $1.4 billion of the coin during the prior week, bringing its total holdings to a mind-boggling sum of more than $52 billion. This wasn’t the first time it made a gargantuan purchase, and it won’t be the last. And it isn’t the only whale that’s accumulating coins right now.

In particular, companies are eagerly buying Bitcoin to hold it on their balance sheets. Megacap businesses like Tesla (NASDAQ:TSLA) and other well-known players are now holders. While it’s true that the purchases made by those wielding large sums of capital might move Bitcoin’s price on a given day, the bigger implication is that they will prefer to retain their coins and then borrow fiat currency, using the value as collateral rather than selling it. So there won’t be as much supply of the coin for future buyers.

And that will drive prices up in the future, just like it is right now.