Bitcoin’s price is surging. What happens next?

Mar 6th 2024

The cryptocurrency is up by 63% this year

On January 10th the Securities and Exchange Commission, an American regulator, approved applications by ten investment firms, including BlackRock and Fidelity, to create bitcoin exchange-traded funds (etfs).

These make it easier for everyday investors to buy the cryptocurrency. Rather than setting up an account with a specialist exchange, creating a crypto wallet, making a bank transfer and then finally buying bitcoin, people can now simply log on to their brokerage accounts and purchase an etf.

Assets in the ten largest bitcoin etfs now come to around $50bn. And the activity appears to be self-reinforcing

Yet it is now obvious that it is of pretty limited use for payments, as it is restricted by both the high costs and slow speed of transactions. Those trying to build applications on top of blockchains are not doing so using bitcoin either.
With the creation of etfs, it is now clear that bitcoin is an investment asset and nothing more.

So after this initial surge of interest, what will its returns look like?

There are two explanations for them. One is that purchases are basically a broad bet on technological progress, with variations that reflect prospects for crypto itself. For instance, even as tech stocks soared in the middle of 2021, bitcoin slumped after Elon Musk posted negative tweets about crypto payments. Prices were depressed in late 2022, too, even as stockmarkets were rallying, owing to ftx’s failure.

The other theory is that bitcoin is a kind of digital gold. After all, supply is inherently limited, just as gold supply is restricted by the amount of the metal in the ground. Neither asset pays a yield or earns profits. This theory fell out of favour in 2021 and 2022, as inflation soared and bitcoin collapsed, but last year the cryptocurrency once again moved in line with gold.

Perhaps both theories contain elements of truth. And a hybrid tech-stock-crypto-vibes-gold-bet asset could be useful in even pedestrian portfolios, especially if it is only somewhat correlated with other assets an investor might hold.
Diversification among uncorrelated assets is the foundational principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge.

If investors buy this argument, bitcoin’s price is likely to rise for a while yet.

What happens, then, when the cryptocurrency’s transition into a standard financial asset is complete?
Assume that bitcoin has been added to most investor portfolios. Also assume that crypto tech does not really catch on. In this world, bitcoin’s returns probably do come to resemble those of gold: there is a fixed amount of it, and its price would rise over the long term roughly in line with the stock of money. That implies steady single-digit returns. The creation of a bitcoin etf may have set off a frenzy of eye-popping gains—but the future it portends could be slower and steadier.