Bitcoin breaks through $94,000, setting a new high
The price of Bitcoin has risen by 37.89% in one month and an astonishing 151.06% in one year. As of November 19, 2024, the fund management scale of Blackrock's Bitcoin ETF has exceeded US$43.985 billion, making it one of the fastest growing ETFs in financial history. As time goes by, perhaps the "one of" should be removed.
Some basic facts you need to know about Bitcoin
1. Bitcoin is the first
Bitcoin is the world’s first decentralized digital currency. While that sounds grandiose, it’s worth remembering that the iPhone came before it. The cryptocurrency launched in early 2009, while the first iPhone was available in mid-2007.
Another interesting fact is that there are more than 13,000 cryptocurrencies in existence. Bitcoin was the first, and the first always has the first-mover advantage. There is even a saying in the cryptocurrency community that "the only cryptocurrency is Bitcoin and the rest."
Given that Bitcoin is a currency, let's look at it from a monetary perspective: There are less than 190 traditional fiat currencies in existence worldwide. The word fiat is not used often, and it means issued and backed by a government, like the dollar or the euro. However, Bitcoin is neither issued nor backed by a government. Obviously, there are far more cryptocurrencies than traditional currencies.
2. The value of fluctuations
The price of Bitcoin has experienced wild fluctuations since the blockchain network was created in early 2009. The folks at Bankrate.com noted that “Bitcoin’s price has been a roller coaster ride since its debut in January 2009, but the long-term trend is upward — ‘up and right,’ as they say.”
3. Digitalization and decentralization
“Decentralized” isn’t a word we use very often. In the world of money, “decentralized” means there are no banks involved.
With Bitcoin, users can send value directly to each other, without the need for intermediaries such as banks. This is part of what makes digital currencies exciting for investors, but it’s also where things get complicated because this is where the technology plays against regulatory priorities.
4. Increased popularity
Bitcoin is gaining wider acceptance. There are probably several factors that have made Bitcoin really active:
The stalwarts (aka innovators) persevered
Broad collective consciousness shifts with the rise of new thought leaders, who often have better educational backgrounds
Bitcoin-related indicators have changed positively, and pragmatists are starting to follow
Larry Fink, chairman and CEO of BlackRock, who once called himself a "proud skeptic of Bitcoin," recently said, "We believe Bitcoin is an independent asset class. It is an alternative like other commodities, such as gold."
Warren Buffett, however, has not changed his mind. He does not believe Bitcoin is a viable investment, but his company has invested in Bitcoin-related companies like Nu Holdings (NU), a digital bank in Brazil that is known for being cryptocurrency-friendly.
For any new technology, such as Bitcoin, the process involved in people accepting and using it involves learning and adapting to change. The adoption and use of a new technology tends to be positively correlated with its expected performance, expected effort, and social impact.
Bitcoin Trends Before the US Election
Investor enthusiasm for the largest digital asset is high in the week leading up to the U.S. presidential election. According to a report from CoinShares, digital asset inflows reached $9.1 billion, bringing the total inflows so far this year to $270 billion, nearly three times the 2021 record.
"We believe current Bitcoin prices and flows are heavily influenced by U.S. politics, with the recent surge in inflows likely tied to Republicans' polling advantage," James Butterfill, head of research at CoinShares, said in the report.
The inflows came almost entirely from Bitcoin. According to the report, Ethereum, the second-largest digital asset, saw $35 million in outflows in the week leading up to the election, the largest outflow of any asset during that period.
Implied volatility in bitcoin options is higher around Election Day on Nov. 5, with bets leaning toward call options, which give buyers the right to buy the cryptocurrency at new highs.
Bitcoin reached an all-time high of $73,797 in March, when prices rallied for weeks on optimism that ETF demand was expected to outstrip the number of tokens available for sale. However, by early August, prices had fallen more than 30% before entering the current bull run.
Trump and Bitcoin
When talking about the value of Bitcoin, there is a joke: "I finally understand the value of cryptocurrencies: they add some volatility to your portfolio. Maybe that's why there are so many supporters in Donald Trump, because Trump at least adds volatility to our politics."
President-elect Trump once said, "I am not a fan of Bitcoin and other cryptocurrencies. They are not currencies, their value fluctuates wildly and they are based on nothingness. Unregulated crypto assets may facilitate illegal behavior, including drug trafficking and other illegal activities."
The price of bitcoin has risen by more than $20,000 since the November 5 U.S. election, with about a third of the gain coming from favorable early election results for the Republicans and the rest gradually increasing as Donald Trump's victory became certain and his party continued to gain seats in the Senate and House of Representatives.
It’s easy to see how a Republican victory would be good for cryptocurrencies. Trump has boasted that he would be a pro-crypto president, promised to stop the federal government from selling cryptocurrencies seized from criminals as it currently does, said he would fire crypto-skeptical Securities and Exchange Commission Chairman Gary Gensler, pushed for U.S. dominance in bitcoin mining, and promised to appoint a cryptocurrency advisory committee so that the rules would be written by crypto enthusiasts rather than cryptophobes. He celebrated on election night with prominent crypto supporters including Elon Musk, Robert Kennedy Jr. and Howard Lutten.
We can get a sense of how government regulation might take shape by the amount of work Congress has already done on crypto-friendly legislation, though no major bills have yet passed either chamber. The House passed the (21st Century Financial Innovation and Technology Act) and a resolution to repeal some anti-crypto SEC rules, both with strong support from Democrats. But neither was taken up by the Senate, and both were opposed by the White House. In the House, two more major crypto bills made it through committee but didn’t get a vote in the lower chamber. In the Senate, a bill to establish a federal strategic bitcoin reserve was introduced.
The data shows that there are 9,635 bitcoins betting on Bitcoin to reach $100,000 on December 27, with a total value of about $780 million, which is the largest bet on any expiration date.
The $100,000 bet isn’t the only sign of growing institutional interest in Bitcoin in the options market. Futures trading at Chicago-based CME Group has increased significantly, with open interest, or open interest, in Bitcoin futures rising 12% since Nov. 5 and Ethereum futures surging 29% to hit a new all-time high.
While many investors appear to be taking an increasingly bullish approach, there is still some caution. Once Trump takes office, he may not be entirely focused on cryptocurrencies, as he has promised so many things that no one knows which one he will take seriously. According to CryptoQuant, Bitcoin's funding rate, or the premium paid for opening new long positions in perpetual futures, has risen since Trump's victory, but it is still well below its 2024 peak.
In the short term, if the federal government holds more Bitcoin and major financial institutions feel safe enough to purchase Bitcoin for their funds and retail clients, additional demand will continue to drive prices higher. But in the longer term, if investors start building diversified portfolios in crypto DAOs and trade using stablecoins or even central bank digital currencies, Bitcoin could lose dominance and risk being sidelined.
How do traditional financial people view the risks of Bitcoin? Opportunity or bubble?
Cryptocurrencies have only been around for about 15 years, which isn’t long in the context of general financial markets, and certainly not long enough to make definitive inferences about their pricing behavior. Still, a pattern is emerging: Cryptocurrencies have very high betas, a measure of an asset’s volatility, and they are highly correlated with the broader stock market. When the market goes up, cryptocurrencies go up more. When the market goes down, cryptocurrencies go down, too, and they go down even more.
Trump became an avid believer in cryptocurrency during the campaign, even campaigning at a Bitcoin-themed dive bar, promising friendlier regulation and raising the possibility that his administration could start a cryptocurrency fund within the Treasury Department. Under Trump, cryptocurrencies may finally go mainstream and become more attractive to institutional investors.
Even if Trump is not a fan of cryptocurrencies, the overall market rally and the high beta of cryptocurrencies may make crypto assets start to dance with them. This makes cryptocurrencies a very risky asset. When others get rich, you get richer. And when the market crashes, you are worse off, just when you may need your money the most. This runs counter to the promise of cryptocurrencies as a safe and reliable store of value, perhaps worse than fiat currencies that have been inflated by governments. Crypto assets claim to be assets that can still hold their value when the global economic system collapses, which is difficult to achieve.
If cryptocurrency did these things, it would become a safe asset — even safer than gold or Treasury bills. But safe assets have a low beta because they promise to maintain their value no matter what happens to the rest of the market. Safe assets can neither add volatility to a portfolio nor provide safety when markets fall. Even gold, a highly volatile asset but one that has intrinsic value and is seen as safe, has fallen recently.
At record highs, many traditional investors from professional institutions remain skeptical. If investors want to increase the risk of their portfolios, cryptocurrencies can play a role, but there are other ways to do this, such as increasing leverage. However, the volatility of cryptocurrencies means that it is not a good means of storing value and is not suitable for large-scale transactions.
Perhaps Bitcoin can be thought of as a financial version of Stein’s Law: Markets can tolerate unreasonable things for decades until one day they stop.
