2021 outlook: Bitcoin faces US regulatory scrutiny after record-breaking rally

The cryptocurrency almost quadrupled, surpassing $20,000 for the first time as it notched record after record. The diehards cheered it as an inflation hedge in an era of unprecedented central bank largesse. Wall Street veterans from Paul Tudor Jones to Stanley Druckenmiller blessed it as an alternative asset, adding to the rally. And companies like MicroStrategy Inc. and Square Inc. moved cash reserves into crypto in search of better returns than near-zero interest rates deliver.

While none of those reasons for buying Bitcoin comport with its origins as an alternative to fiat currencies, they do point to a growing acceptance of crypto as an asset class of its own. And that has the zealot-like community taking yet another victory lap in their quest for legitimacy.

“What’s happening now — and it’s happening faster than anyone could ever imagine — is that Bitcoin is moving from a fringe esoteric asset to the mainstream,” said Matt Hougan, chief investment officer of Bitwise Asset Management. “If it’s going mainstream, there is just so much money on the sidelines that is going to have to come in and establish a position that it leaves me very bullish for 2021.”

But with Bitcoin capturing greater attention, it could also garner further scrutiny from regulators, says Guy Hirsch, managing director for the U.S. at online-trading platform eToro. “Despite this meteoric rise, there are some storm clouds on the horizon,” he said, including the fallout from several last-minute actions by the outgoing Trump administration, among others.

Devotees say that in some ways, the pandemic-ravaged year proved the perfect environment for the digital coin. Warnings of rampant money-printing by global central banks — some of which started to reveal their own interests in digital assets — sparked fears of eventual inflation, while interest rates dipped to rock-bottom lows. That’s thrust some investors to chase returns and hedge with cryptocurrencies, pushing its price past $28,000 from around $7,200 at the start of January.

Predicting where it will go is a fraught exercise. Many left the coin for dead after its 2017 rally resulted in a crash the following year, a stretch of time sometimes referred to as the “crypto winter.” But it’s surged more than 300% in 2020 and many investors say it could continue to gain next year. A Deutsche Bank survey found a majority see it ending 2021 higher, with 41% of participants projecting a target between $20,000-$49,999 and 12% seeing it crossing above $100,000, according to Jim Reid, a strategist at the firm.

What else is on the radar? To Meltem Demirors, chief strategy officer at digital-asset manager CoinShares, there are some concerns about what the incoming Joe Biden administration might mean for the crypto space.

“Generally, I think we have had challenges with the Dems — they prefer more regulation, more oversight,” Demirors said. “I am a bit worried…