Bitcoin’s Thrilling Ride: Gains, Risks, and Market Reactions
The Fed’s recent decision to limit anticipated rate cuts has stirred anxiety in the markets, affecting Bitcoin (BTC) significantly. After an impressive rise of over 150% this year, Bitcoin has retraced some of its gains. Yet, there are positive signals heading into 2025, including supportive government policies, increasing interest from institutions, and market momentum (read Buy, Sell, Or Hold Bitcoin). A target price of $150,000 feels plausible. Nevertheless, history warns us of the risks of potential corrections, particularly in light of the latest Fed announcement.
Market reactions were immediate, evident by the NASDAQ’s -3.5% decline, which could weigh heavily on risky assets like Bitcoin in the short term. A dangerous mix exists due to the rising leverage in positions, Bitcoin’s lack of intrinsic value, and its vulnerability to market manipulation due to limited supply. A 20% correction from current levels cannot be overlooked. While Bitcoin may hold significant promise, it also comes with substantial risks. For those seeking stability alongside growth, the High Quality Portfolio offers a notable alternative, having outperformed the S&P 500 with over 91% returns since inception.
High Leverage and the Shadow of Past Crashes
Bitcoin trading frequently involves high leverage, which intensifies its price swings. When the market falters, these leveraged positions are often the first to be liquidated, leading to a domino effect. Recently, a day saw over $2 billion in Bitcoin positions liquidated, resulting in a 6% price drop. Historical events like the onset of the COVID pandemic remind us of the dangers of leverage, as Bitcoin’s price plummeted around 50% at that time. Between February and October 2024, the Estimated Leverage Ratio surged by 37%, while open interest in Bitcoin futures reached a record high of $63 billion in November 2024.
Leverage introduces significant risk, and past evidence supports this concern. From December 2017 to 2018, Bitcoin’s high leverage exacerbated a market crash, leading to an 80% price drop. In March 2020, as financial markets were shaken by COVID, Bitcoin endured severe price declines, causing approximately $1 billion in leveraged positions to be liquidated in a single day. Furthermore, regulatory crackdowns in China and liquidity crises involving Almeda Research and FTX in late 2022 further impacted Bitcoin’s stability.
The pressure from leveraged selling complicates investors’ ability to weather bearish markets. Liquidations can ignite a cascade effect that drives prices down. Although cryptocurrencies have delivered impressive returns historically, outperforming the overall market consistently — in both prosperous and challenging times — remains a formidable challenge. In contrast, the Trefis High Quality (HQ) Portfolio, featuring 30 carefully selected stocks, has outperformed the S&P 500 every year during the same timeframe. Why? These stocks typically yield better returns with less risk, clearly illustrated in the HQ Portfolio performance metrics.
| Returns | Dec-24 | 2024 | 2017-24 |
| MTD [1] | YTD [1] | Total [2] | |
| BTC Return | 7.5% | 146% | 1093% |
| S&P 500 Return | -1% | 25% | 167% |
| Trefis Reinforced Value Portfolio | -4% | 19% | 760% |
| [1] Returns as of 12/26/2024 | |||
| [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.
