The last few days have been pretty good for Bitcoin.
While all eyes have been fixated on the wild swings in the stock market, the cryptocurrency has jumped nearly 30% over the past week and is trading just below $10,000.
This rebound comes just after Bitcoin shed nearly $10,000 in price earlier this year, which has some investors wondering if the plunge in cryptocurrencies, like the sell-off in stocks, may be over.
Bitcoin’s ‘supply’ problem
Like many of Bitcoin’s moves, there isn’t an apparent reason why the price of Bitcoin has jumped higher this week.
Recently, though, one commodity strategist, Mike McGlone of Bloomberg Intelligence, put a target price for Bitcoin that was less about hyperbole and more about fundamentals. McGlone says that Bitcoin’s target price should be $900 a token.
That’s significantly higher than zero, but it still means Bitcoin may be 90% overvalued.
The reason for McGlone’s tepid price target: The supply.
Bitcoin bulls argue that the coin will almost assuredly see further price appreciation, because there is a cap on the number of Bitcoin tokens that can be mined.
There are 21 million Bitcoin tokens available, based on the algorithm. And once they’re mined, then there will never be another new Bitcoin put into circulation. About 80% of the coins have been mined to date.
Except, that’s not entirely true. A number of Bitcoin “offshoots” have been created within Bitcoin’s blockchain. These related currencies, known as “forks,” are being developed as the crypto community searches for improvements to the way Bitcoin currently functions.
Bitcoin Cash was the first of these so-called forks, and then Bitcoin Gold and Bitcoin Diamond followed shortly thereafter. When you factor in the supply of all Bitcoin when combined with its forks, you’re looking at more than 50 million coins.
“These forks are very bad for Bitcoin,” Sol Lederer, blockchain director at Loomia, told CNBC when Bitcoin Gold split in October. “Saturating the market with different versions of Bitcoin is confusing to users, and discredits the claim that there are a limited number of Bitcoins — since you can always fork it and double the supply.”
This doesn’t just impact Bitcoin. Popular alt-coin Ethereum saw two forks in January.
Meanwhile, concerns over supply aren’t just limited to forks.
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There’s also the question of just how much demand the world has for all the various alt-coins popping up to compete against Bitcoin.
About $4 billion was raised in 2017 during initial coin offerings, and there’s now over 1,500 different coins listed on CoinMarketCap.com.
Worries that supply is outpacing demand have been exacerbated by the fact that Bitcoin’s average daily usage (as a currency) has hardly budged (or fallen) since the beginning of 2017.
“Parabolically increasing supply is the primary limitation to cryptocurrency market-price appreciation,” McGlone said in an interview with Bloomberg. “There’s strong gravitational pull toward $900, the average price since inception and the start of 2017.”