Cryptocurrency Buzz: Bitcoin’s Surge Sparks New Investor Interest

This year, Bitcoin’s price has surged, prompting renewed interest from investors and the media. A crucial question for retail investors is: What has fundamentally changed in the cryptocurrency market that led to a remarkable increase of over 120% in Bitcoin’s value over the past year? Notably, this price increase has coincided with higher trading volumes, suggesting strong buying enthusiasm.

The story doesn’t stop here. There’s buzz that Bitcoin could cross the $100K mark soon, moving from its current price of around $65,000—a potential increase of more than 50%. The question remains: Will Bitcoin’s journey mirror oil prices during the 2008-09 financial crisis, where the number 100 caused anxiety among investors? Or is the Bitcoin narrative destined for a different plot twist?

Understanding Market Dynamics

Generally, investment assets, especially cryptocurrencies, are challenging to price through traditional demand-supply models. Still, expectations around demand and supply significantly impact price movements. For Bitcoin, prices over the years have largely been influenced by how news stories affect the potential user base and their transaction activities.

In this analysis, Bitcoin’s demand hinges on two main factors:

• the number of active users
• the volume of transactions occurring.

On the supply front, Bitcoin availability is capped, with approximately 94% of the total already mined. Given this limited supply, it is prudent to concentrate on demand metrics, particularly user engagement and transaction levels.

Shifts in Demand Factors

Recent developments significantly bolster Bitcoin’s demand outlook. Firstly, there is a renewed consensus that Bitcoin may serve as a viable alternative to the US dollar, particularly in light of uncertainties surrounding the dollar’s stability.

Secondly, political backing plays a crucial role. Prominent candidates like Trump and Harris have expressed support for digital technologies and assets, reinforcing the notion that government policies may favor Bitcoin and other cryptocurrencies moving forward. In recent years, negative governmental actions have tended to hinder crypto price movements, but no major restrictions have emerged from major economies lately.

Lastly, retail investors’ risk perceptions can shift dramatically when institutional investors take positions in Bitcoin. The introduction of BlackRock’s spot Bitcoin ETF, one of the fastest growing ETFs this year, has been pivotal in enhancing investor confidence in Bitcoin as a long-term asset. This development indicates increasing interest and participation among Bitcoin users—key demand indicators.

Assessing Bitcoin’s Current Attractiveness

Historically, Bitcoin has exhibited extreme volatility. For instance, the asset delivered returns of 60% in 2021, plummeted by 64% in 2022, and rebounded with a staggering 155% in 2023. Consistent returns across varying market conditions have proven elusive for most asset classes. In contrast, the Trefis High Quality (HQ) Portfolio, which comprises 30 stocks, has outperformed the S&P 500 annually during the same timeframe. This highlights a trend where HQ Portfolio stocks delivered superior returns with reduced risk—resulting in a less tumultuous investment experience.

Considering current demand and supply dynamics, only time will reveal whether Bitcoin retains its status as a promising but underperforming asset class over the next year, or if it will achieve a significant surge toward the $100K milestone.

The Significance of the $100K Benchmark

The interest in Bitcoin options striking around $100K has escalated, as evidenced by a notable rise in open interest at this level. Each open position represents a buyer and a seller, and an increase in strike positions indicates potential upward momentum.

Some of these positions may lean toward speculation, possibly keeping Bitcoin prices volatile and risky for short-term investments. However, if demand for Bitcoin continues to gain traction, it may only be a matter of time before it crosses the $100K threshold. Meanwhile, to achieve this, Bitcoin must navigate several key resistance points at $70K, $80K, and $90K, which are likely to contribute to price fluctuations in this range.

[1] Returns as of 10/15/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.