Bitcoin Rising: A Rational Move or Mass Hysteria?

The financial news and the crypto media are abuzz with Bitcoin’s recent rise—from approximately USD 22,000 to almost 39,000, a 77% increase, between September and December 2023. But is this a measured move due to well-established fundamentals, or is it just another hype-driven Ponzi scheme that will collapse even faster than it rose?

Caveat Emptor – Buyer Beware

Before getting into the topic, it’s important to remember—especially in cryptocurrencies—that all sales are final and “buyer beware.” It doesn’t mean that all cryptos, and Bitcoin in particular, are scams, but it’s a reminder that you should always perform your due diligence before investing in anything for any purpose but entertainment, so do your research, talk to experts, and make sure you understand as much as you should. What can make that challenging is that traditional advisors have avoided or even shunned Bitcoin as an investment vehicle, with some banks going as far as ending relationships with clients involved in crypto and, at the same time, some of the market’s loudest enthusiasts have also been the least credible. That trend is changing, but it’s good to remember the foundations of good investing practices: diversify your portfolio, and past performance is not indicative of future results.

The early days

When STORM Partners reminisces about the early days of Bitcoin with other early adopters, the stories invariable run around a few themes: one person will talk about how they were gifted a Bitcoin or purchased it at an absurdly low price, and then lament that they sold it at only ten or a hundred times its original value. Another person will share a story about how they lost their passkey or transferred the Bitcoin to the wrong wallet and never got it back. These memories are often revisited with dark chuckles and a twinkle in their eyes because it was a brave new world back then, full of arcane practices, sudden ups and downs, and harsh lessons.

What’s different about 2024?

Several large institutions that previously shunned Bitcoin have started adopting it, either by offering Bitcoin-related services or integrating it into their business models. Goldman Sachs has cautiously ventured into Bitcoin, offering Bitcoin derivatives to clients. Fidelity Investment, a giant in asset management, has launched a Bitcoin fund and offered custody services, indicating strong institutional interest. While initially skeptical, JPMorgan Chase now offers Bitcoin fund services to its clients. Even the world’s largest asset manager, BlackRock, has included Bitcoin futures in two of its funds, highlighting the growing acceptance of Bitcoin in traditional finance.

In addition, governments like the US and the EU have moved to regulate cryptocurrencies in the same way they would other digital currencies or digital assets. While this can make things complicated for businesses that did not get close to regulators prior to the new laws, it paves the way for mainstream adoption and heightened consumer protections.

Fundamental Forces

Beyond simple bullish sentiment, there are some fundamental levers that might be driving the recent Bitcoin rally:

• Store of value: like gold, Bitcoin has historically provided a hedge against the effects of inflation. In fact, it has done so more effectively than gold, gaining value faster than everyone’s favorite metal vs. increases in USD liquidity.
• Ease of access: unlike gold, you don’t need a vault to store Bitcoin. It is available 24/7, and you can carry millions of dollars’ worth of it in your pocket.
• Fresh adoption: while crypto used to be the exclusive domain of techies and enthusiasts, it is increasingly becoming more accessible, including through more traditional instruments like Exchange Traded Funds, with increased engagement from both older and younger generations than before.
• Halving: part of the design of Bitcoin includes a phenomenon called “halving” which reduces the reward received by Bitcoin miners by 50% (hence the name). Think of it as closing flow of new Bitcoin by half every four years or so. Less growth in supply with increasing demand leads to higher prices.

Conclusion

The evolution of Bitcoin over the past years and, more relevantly, in the past few months, has shown many that Bitcoin was not the flash in the pan some expected it to be. The loss of two-thirds of even such a dominant player’s value in 2021-2022 serves as a warning that cryptocurrencies are still a very risky investment, especially to the uninformed and unaware, but mainstream adoption and regulation are changing that, and a surge of 128% in 2023 with a return of bullish sentiment might mean that it’s time for another look.

Whether the rise is due to fundamentals or a fear of missing out is yet to be determined.

Bio

D.J. Bodden is the Operations Director at STORM Partners, an entrepreneur and a tech-head who helps Web3 startups grow by day and writes science fiction by night. Reach out to talk about the future of your business or the far future of humanity.