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Why Does the Price of Bitcoin Keep Going Up? The Answer Might Surprise You.

Source The Motley Fool

Key Points

With Bitcoin up 40% since July, ETF inflows have now turned positive for the year.
Amid macroeconomic uncertainty and geopolitical tension, the "digital gold" investment thesis has returned.
With the dollar-based global economic system under pressure, some investors would rather hold Bitcoin than dollars.
10 stocks we like better than Bitcoin ›

Since July, when it briefly dipped below $60,000, Bitcoin (CRYPTO: BTC) is up a resounding 40%. That's particularly impressive, given the spate of negative news that has hit the crypto market recently, including Congress' failure to advance the Clarity Act.

So why, exactly, is the price of Bitcoin soaring? These four factors offer the best explanation.

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Bitcoin ETF inflows

The easy answer is "ETF inflows." Money is once again flowing into Bitcoin ETFs at a prodigious rate, and that is helping to push up the price of Bitcoin. The funds actually buy and hold coins, so there's real substance in this argument.

Image source: Getty Images.

The reversal since July has been particularly striking. In mid-July, Bitcoin ETFs were facing net outflows of $5.8 billion for the year. Two months later, that has flipped to a net inflow of $800 million.

But I'm not entirely satisfied with this explanation, because the cause-and-effect order is unclear. Is the price of Bitcoin going up because ETF inflows are increasing? Or are ETF inflows increasing because the price of Bitcoin is going up?

Bitcoin as digital gold

Another possible explanation is the return of the "digital gold" investment thesis. Some investors view Bitcoin as a potential hedge against inflation and geopolitical instability, just like physical gold.

As a result, the correlation between Bitcoin and gold recently hit a six-year high. At a time of macroeconomic uncertainty and geopolitical tension, it makes sense that investors are looking for safe-haven assets. That could be persuading investors to embrace Bitcoin.

But, again, this explanation is not entirely satisfying. For much of the year, Bitcoin was behaving like a high-beta tech stock. How is it possible that it can behave like a risky asset for half of the year, and like gold for the other half of the year?

Bond market feedback loop

Finally, another possible explanation involves a potential link between recent buybacks of long-term U.S. Treasury debt and the price of Bitcoin. This suggests a feedback loop between the bond market and the crypto market.

Replacing longer-term Treasury debt with shorter-term, lower-cost debt will lower interest rates and reduce the cost of borrowing for the U.S. government. These lower interest rates should also make risky assets such as Bitcoin more appealing, especially to investors seeking higher returns.

But didn't the Federal Reserve just announce plans to hike interest rates? Aren't bond yields rising? So again, this explanation by itself doesn't look complete.

Bitcoin as the future of money

Based on what's happening in the Middle East right now, the dollar-based global economic system appears to be coming apart at the seams. As a result, hedge fund managers continue to talk about a potential replacement of the dollar as the world's reserve currency.

And that is where Bitcoin enters the conversation. Ultimately, Bitcoin is not just a digital currency. It is also a financial innovation powered by blockchain technology.

As such, Bitcoin could be the future of money, which helps explain why it continues to soar in value, even without an obvious catalyst.

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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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