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Bitcoin's all-time high reveals the true nature of crypto

Emily Stewart   

Bitcoin's all-time high reveals the true nature of crypto

Bitcoin's been back on the upswing — and already a little bit back on the downswing. After a couple of years in the doldrums, the digital currency surpassed its all-time high on Tuesday, set in late 2021, of nearly $69,000 per coin. Optimistic forecasters are tossing out some quite lofty predictions about where bitcoin could be headed. $100,000! $200,000! $500,000! In the cryptocurrency world, it is a very exciting time.

If it feels like we've been here before, it's because we have: Sudden price jumps caused a surge in attention for bitcoin in 2013 and 2017 and 2021 and some times in between. On almost all these occasions, the sharp run-ups were followed by sharp declines. Investors seem to be stuck in a perpetual boom-and-bust cycle where they get back on the bitcoin horse every few years only to get burned.

It's not certain that everyone will get wiped out once again, though after bitcoin hit its new high, its price fell almost immediately by thousands of dollars. Different investors buy in at different times, and many true believers never sell, no matter what happens. And hey, maybe this will all work out this time, but it's impossible not to recognize the pattern here.

"Bitcoin from the earliest days has been very volatile," said David Yermack, a professor of finance and business transformation at New York University's Stern School of Business. "What you're seeing now is entirely consistent with its history."

The main explanation for the recent gain in bitcoin's price is the Securities and Exchange Commission's begrudged blessing of spot bitcoin exchange-traded funds, investment vehicles that track bitcoin's price. They're more accessible for investors, easier to trade, and better regulated than a direct investment in bitcoin. Like all ETFs, they also come with a small fee. The SEC approved nearly a dozen of these funds, including products from Wall Street stalwarts such as Fidelity and BlackRock, who've come around on the asset class after years of saying bitcoin gave them the ick. This has helped legitimize the asset class and made more people comfortable investing in it, especially when it's packaged in the familiar ETF format.

Bitcoin from the earliest days has been very volatile. What you're seeing now is entirely consistent with its history. David Yermack, New York University's Stern School of Business

The ETFs have gotten popular fast: The 10 leading bitcoin ETFs have taken in $7.3 billion in inflows since their debut. Hundreds of millions of dollars poured in after the SEC's approval in January. BlackRock's iShares Bitcoin Trust raked in over $500 million a day in the final three days of February. This week, Fidelity saw $400 million in inflows in a single day. As bitcoin ETF providers have to invest in the underlying assets — bitcoins — demand for those assets increases. And as bullishness around the cryptocurrency picks up, investors start directly buying bitcoin, too. This creates a virtuous cycle of demand and boosts the price.

Eric Balchunas, a senior ETF analyst at Bloomberg Intelligence, described the degree to which the bitcoin ETFs have taken off as "pretty unprecedented." He figured this would be more analogous to the launch in 2004 of the first gold ETF, which cooled off quickly after a hot start.

"The speed of the come-up is much faster than I thought," he said, adding that he was specifically surprised at retail-trader activity in the bitcoin ETFs. "I thought we'd see bigger, chunkier advisors, almost like medium-sized or big fish fighting. I underestimated the amount of minnows."

People I spoke with about bitcoin's current run had a range of theories about its factors aside from the ETF go-ahead. James Butterfill, the head of research at CoinShares, told me this rally is more "fundamentals driven" than rallies in years past. The prospect of interest-rate cuts by the Federal Reserve has investors of all stripes bullish on riskier assets, including crypto. In April, a so-called halving, which happens every four years, will cut the rate at which miners can create new bitcoins; the idea is that by slowing the supply of new bitcoins, the price will increase, though it's not clear how much of an effect it has since everyone knows it's coming. (Also, not everyone agrees it will be good for bitcoin's price.) Others pointed to technological improvements in crypto and bitcoin, or to troubles at New York Community Bancorp, or to Argentina's presidential election.

And then there's just good old speculation.

"I still think that's an element pushing up prices this time, too," Butterfill said, "and maybe a little bit of FOMO, as people like to put it."

Of course, whenever there's a sudden boom in bitcoin, the next question is when is the bust coming? It's impossible to predict the future, but past bitcoin crashes have been precipitated by different events: regulatory crackdowns, exchange breaches, product collapses, bubbles just bursting. Perhaps the very thing driving the rally, the ETFs, could be the boom's undoing — investors start pulling out, so the funds start selling the underlying assets, and the upward spiral becomes a downward one.

Plenty of other cryptocurrencies have surged: ether, litecoin, dogecoin, shiba inu coin, insert-meme-here coin. And except for ether, they don't appear to have an ETF (or purpose) on the horizon. "It's the kind of really nihilistic speculative activity that characterized the end of the previous bull markets," said Nic Carter, a general partner at Castle Island Ventures, adding that this crypto activity isn't necessarily cause for optimism about bitcoin's future.

Or maybe, just maybe, the latest run will cement bitcoin's future as a more stable part of people's investment portfolios. Carter told me that while there's a lot of excitement at the moment, he thinks bitcoin is on its way to being a "boring" asset as it becomes more institutional and as the ETFs provide more-permanent buy pressure.

"There's not a lot of uncertainty left about bitcoin. It became a key financial asset. It achieved its destiny, and now that it's there, I think there'll be slower growth but also less downside volatility," he said, though he didn't rule out some potential for mania. Bitcoin dipping by nearly 10% hours after hitting an all-time high would suggest mania is still in the equation.

The overarching theme of bitcoin remains what it's always been: It's volatile, and with that volatility comes risk.

"Bitcoin has always exhibited a fair amount of what we call momentum trading, which is that once it starts to move, people jump on the train for fear of missing out," Yermack said. "And this works in two directions."

The ride up has some familiar elements. The bitcoiners claim victory, the naysayers wag their fingers, and at some point a friend from high school texts to ask if crypto is a good way to make quick money — a sign the peak is near. The ride down looks similar, too. The people who didn't buy in laugh at the ones who did, and a cast of characters come out to declare the crypto endeavor is dead. Rinse and repeat.

Investors are back on the bitcoin roller coaster — and it looks as if they might be there, riding its ups and downs, in perpetuity.


Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.


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