Despite not being an environmentally friendly technology, the allure of Bitcoin is remarkable. The story of a decentralized, inflation-proof, alternative non-political global currency still captivates young, professional, experienced investors and novice investors all at the same time. Taken together, those recent market indicators are a clear sign of a bullish trend. For context the ICE/BofA U.S. High Yield Index Option-Adjusted Spread (OAS) has fallen to 3.2%, reflecting a hunger for risk across both crypto and equity markets. And with many widely followed prognosticators predicting new all-time highs by the summer, the siren call of FOMO is hard to resist. As an observer of market cycles over the last several decades, I’ve come to understand that shortsighted exuberance is frequently just a thin veneer covering deep-seated fragilities.
Honestly, the current environment is starting to feel all too familiar. Then we see the headlines, uplifting Bitcoin’s resilience, how it’s able to avoid traditional market forces. At the beginning of the pandemic-related shutdown in March of 2020, Bitcoin’s value skyrocketed. It closed the year up a staggering 42,258%—true, traditional assets such as the S&P 500 and Gold decreased in value. The picture was similar in 2021 as Bitcoin continued to soar to new highs while other assets crashed abruptly. And once more in 2023, Bitcoin came roaring back, closing the year at $42,258. The consistent inverse relationship is compelling, but it raises a critical question: is this sustainable, or are we witnessing a bubble inflating before our eyes?
As the OAS has decreased, we have seen a narrowing between high-yield bonds and lower risk Treasury notes. This transformation is a sign that investors are growing more appetitive towards risk taking. This, in turn, is providing the jet fuel for rallies in risky assets, such as Bitcoin and tech stocks (Nasdaq). While this correlation is indeed accurate, it is risky to use only this one indicator on its own. We know that market sentiment changes quickly. What looks like an approval signal for innovation today could be converted into an indication of concern about risk-taking indefinitely soon. I’m here to tell you that I’ve seen this happen 99 times out of a hundred.
What’s more is that the story about institutions adopting Bitcoin is really convincing. In 2024, a new wave of institutional investors contributed to making Bitcoin’s adoption more mainstream. They focused on diversification of revenue streams, regulatory compliance, and smart environmental practices. Over half of institutions plan to increase their allocations to digital assets over the next few years. No one can argue that this trend isn’t a good thing for the industry. The growing involvement of traditional hedge funds, with some allocating significant portions of their funds to digital assets, further validates Bitcoin's growing legitimacy. In 2023, forty-two percent of institutions increased their investments in digital assets. Following the wave of exchange-traded products (ETPs) pegged to Bitcoin (BTC), an astounding 68% of institutions have already invested in, or will soon invest in, this registered vehicle. Institutional investment does not prevent price corrections from occurring. Institutions tend to herd, just like individual investors. This behavior can lead to bubble-like price increases and boom/bust cycles as they chase the crowd instead of trading on their own conviction.
The case for Bitcoin’s long-term sustainability has long focused on its technological superiority. With upgrades already underway in blockchain architecture — including sharding and off-chain transactions — there are potentially major advancements to scalability on the horizon. The use of highly specialized hardware and software further increases maximal transaction processing capacity. Moreover, second-layer scaling solutions as the Lightning Network further improve network robustness and efficiency. Advances in cryptography provide secure transacting capabilities on Bitcoin, further protecting it against attacks. These developments have not stopped and only time will tell what effect they will ultimately have on Bitcoin’s price volatility or its perceived stability.
The accelerated adoption of Bitcoin by Fortune 500 companies and other large corporations is used as a bullish indicator. While this is undoubtedly a positive development, it's important to remember that corporate adoption is driven by a variety of factors, not all of which are directly related to Bitcoin's intrinsic value. They might do it because of the marketing grabs, they might do it to attract tech-savvy, future-looking customers, or even just to not be left behind. All of these factors may indeed lead to temporary price hikes, but these are no substitute for ensuring long-term price stability.
Bitcoin volatility has increased to a six-month high. Others among the economic intelligentsia are bullish, with some calling for it to threaten new all-time highs by mid-year, bolstered by favorable global liquidity conditions. Though many might view this boom-bust volatility as an indication of opportunity, I view it as a flashing warning sign. Extreme volatility is a common characteristic of speculative bubbles, and usually comes just before a sudden and painful correction.
My concern isn’t with Bitcoin’s potential being dismissed entirely. It’s not though. To be clear, this isn’t about dampening excitement, or enthusiasm, or innovation. The market's current exuberance reminds me of past bubbles I've witnessed, where the fear of missing out (FOMO) drives prices to unsustainable levels. Examples of how technological advancements, institutional adoption, and other positive market indicators have strengthened the bullish case. These measures fail to remove the risks that come from investing in a risky and speculative asset.
The upside potential of Bitcoin is alluring. Keep in mind, as recent history has taught us, bubbles tend to pop when you least expect them to. Investors need to tread carefully, do their homework and not get swept away by the excitement. A balanced portfolio, diversified across multiple asset classes, remains the most prudent approach to navigating the complexities of today's markets. Even if you’re tempted by the promise of easy profits, going in without understanding the risks means opening yourself up to major financial pitfalls. Whether the high-wire act that Bitcoin is performing sticks the landing and enables it to reach great heights, or a dizzying fall remains to be seen.
