Bitcoin Surges Into 2021, Rose Nearly 20% Over Weekend

Bitcoin has been on an extended rally since early September, part of the “everything rally� that has fueled gains in stocks, emerging markets and other assets.

In many respects, what has happened in the first few days of 2021 resembled a stock market “short squeeze,� said AvaTrade analyst Naeem Aslam. He was referring to the cascade of buying that can happen when investors respond to a price jump by buying back stock they have sold in an effort to keep their losses from mounting.

It wasn’t just bitcoin that took a wild ride. The price of ether, the second-largest cryptocurrency, rose as much as 35% over the three-day weekend, trading above $1,000 for the first time since early 2018. Ether added to those gains Monday, most recently up 15% at $1,036.

The moves were so strong they are likely to spark a backlash, Mr. Aslam said. “Traders need to be mindful that a correction is looming.�

A correction of sorts did occur, again illustrating the volatility of the asset class. After bitcoin hit its new high, the price fell 15%, trading as low as $29,069 early Monday morning. Most recently, it was trading at $31,906.

Bitcoin, introduced in 2008, was designed as a digital version of cash that could operate outside the control of governments or central banks. Its software runs on a network of linked but independent computers, and that decentralized structure makes it ideal for moving money quickly and cheaply across borders.

Last year when the Federal Reserve cut interest rates, pushing down the value of the U.S. dollar, bitcoin became a fashionable bet as an inflation hedge, though that status has yet to be proved.

There was also a notable influx of professional traders last year, highlighted by billionaire investors like

Paul Tudor Jones

and

Stanley Druckenmiller.

Companies such as

MicroStrategy Inc.

and Massachusetts Mutual Life Insurance Co. started buying bitcoin as well.

Trading platforms including

PayPal Holdings Inc.,

Square Inc., Robinhood Markets Inc., and Webull Financial LLC began to allow their customers to buy and sell it, bringing in a new wave of smaller investors. The largest U.S. cryptocurrency exchange, Coinbase Inc., plans to conduct an initial public offering in 2021, giving the public its first chance to buy equity in a major industry company.

Those moves have sparked a new wave of investment into what is essentially a very small market. The total market value for bitcoin is just under $600 billion, far below the market cap of the biggest individual stocks, like

Apple Inc.,

currently worth more than $2 trillion. It is also well below the total market value of the gold market, which was about $11.9 trillion at the end of 2019, according to the World Gold Council.

With the latest run to record highs, there is a discernible split in investor opinion about what comes next, said

Beatrice O’Carroll,

the founder of an over-the-counter trading firm called NautilusTech. About half of the investors she has talked to are expecting a correction, and half “are cheering it on and trying to figure out where their profit-taking price point should be.�

That is coming just as outside interest appears to be peaking again.

Searches of the word bitcoin on Google have reached their highest level since the 2017-2018 rally, according to research firm TradeBlock. “In recent days a flurry of media articles and trending

Twitter

topics has spurred renewed interest in the asset for retail investors,� the firm wrote in a note.

Meanwhile, the gains for bitcoin and ether have been mirrored by a selloff in the third-largest cryptocurrency, XRP.

XRP is down more than 50% since the Securities and Exchange Commission sued the company that created it, Ripple, alleging the company should have registered XRP as a security. XRP most recently was trading at 23 cents.

Write to Paul Vigna at [email protected]