Bitcoin is ... back?

Bitcoin’s surge is fueling crypto optimism.

Bitcoin hit a new record price on Tuesday, surpassing its previous all-time high of $68,790 set in 2021, and some financial experts say the cryptocurrency’s recent surge could cement its status as a viable alternative to state fiat currency.

This is a big moment for bitcoin, which has long been vying for legitimacy among traditional investors. Recent regulatory changes that make bitcoin easier to trade mean that more of those investors are now finally embracing it as part of a diverse investment portfolio.

There are a couple of factors driving the surge. For one, the Securities and Exchange Commission gave the green light to the first US bitcoin exchange-traded funds (or ETFs for short) in January, which has drawn in new investors and made it easier for them to trade the cryptocurrency.

Previously, investors had limited options for trading bitcoin. They could go on a cryptocurrency exchange to directly buy bitcoin but then would have to figure out how to safely store it long-term. They could also invest in risky bitcoin futures, agreeing to buy or sell at a later date at a certain price.

But now, under the new SEC regulations, they can trade bitcoin through an ETF, which is a basket of financial instruments (such as stocks, bonds, commodities, or in this case, bitcoin) that you can buy or sell on a regulated stock exchange. Firms including BlackRock, Invesco, Fidelity, Grayscale, and Ark Invest have recently rolled out a some of these bitcoin funds. This has made bitcoin far more accessible to amateur investors.

The bitcoin rally is also being sustained by the upcoming “halving” event in April, when the rate at which new bitcoins are generated will be cut in half. Satoshi Nakamoto, a pseudonym for bitcoin’s anonymous inventor(s), scheduled this to happen every four years until the bitcoin supply hits the maximum they set of 21 billion, creating an artificial scarcity of bitcoin and therefore driving up the price. This is meant to imitate the real-life scarcity of precious substances like gold, trading on the idea that bitcoin is “digital gold.”

However, bitcoin has surged before, only to crash precipitously. In November 2022, bitcoin’s value dropped 20 percent to below $16,000 in a matter of days after the spectacular downfall of the crypto exchange FTX. Some governments are looking to tighten their regulation of crypto markets in the wake of the FTX catastrophe. The concern remains that the price of crypto is based purely on speculation, rather than any inherent value.

“The bitcoin surge is yet another manifestation of what Hyman Minsky characterized as the inherent tendency of financial instability that plagues the financial system,” said Ramaa Vasudevan, an economics professor at Colorado State University who has been critical of crypto. “It is the outcome of the euphoria of investors awash with funds seeking outlets for quick financial returns, despite the recent scandals and turmoil that roiled the cryptosphere.”

For investors, this persistent volatility has created a dilemma: On the one hand, they are wary of putting their money into a risky investment, but, on the other hand, they fear missing out on potential upside when bitcoin’s value is rallying and breaking into the mainstream.

“Bitcoin is a first-of-its-kind digital asset with unique economic properties,” said Christian Catalini, founder of the MIT Cryptoeconomics Lab. “While we’re still trying to understand the full value of this invention, with more institutional adoption — including the recent approval of ETFs — it is becoming increasingly clear that bitcoin will be a foundational asset for the future of the financial system.”

What does the bitcoin rally signal about the future of crypto?

It’s too soon to tell whether this is another bubble destined to burst or a fundamental breakthrough for bitcoin’s legitimacy. Catalini says the current surge follows a decade in which the “value of the bitcoin network has been steadily increasing.”

“Yes, there have been wild fluctuations in between,” he said. But if you look at the data in terms of the percent by which the price of bitcoin is moving, “the pattern is obvious.” It shows sustained exponential growth.

Alex Thorn, head of research at the digital asset investment firm Galaxy Digital, said in a statement that there’s reason to believe that the upward trend will continue. The advent of bitcoin ETFs is fueling that: There is still $40 trillion in assets under management at banks, investment brokers, and registered investment advisors that are only just beginning to provide their clients access to these ETFs, Thorn said.

“I think we’ve just seen the tip of the iceberg, and there’s a whole lot more demand beneath the surface that we haven’t yet,” said Ryan Rasmussen, senior crypto research analyst at Bitwise, an asset management firm specializing in crypto. “I think there’s a lot of capital — a lot more than most people think — still sidelined, waiting to hit the buy button as soon as they’re cleared to do that.”

Buyers utilizing ETFs could also help reduce some of the volatility in the crypto market since they are “much less likely to day trade than cryptocurrency exchange users,” Thorn said. bitcoin’s volatility has calmed significantly in the 15 years since it made its debut, but that might also just be reflective of the fact that as is the case with most asset classes, “the larger they get, the more mature they get, volatility falls,” Rasmussen said.

Courtesy of Bitwise Asset Management

Another sign of the cryptocurrency’s growing stability is the fact that long-term bitcoin holders mostly aren’t selling, which has been a prelude to prior dips. That could be in part because investors are trying to position themselves to benefit from the supply shock created by the upcoming halving. Past halvings have typically been followed by a rally.

That all of this is happening in a high-interest rate environment is also evidence of bitcoin’s strength. It’s not clear whether the Federal Reserve will cut interest rates this year, so long as inflation remains above its two-percent target rate. But when it does, the money supply will likely loosen and “just add fuel to this rally,” Rasmussen said. “We’re set up for a continued bull run.”

Others, however, aren’t so optimistic about bitcoin’s longevity. Vasudevan said that, fundamentally, “Bitcoin is a speculative financial asset, and like the previous rallies, this rally will also crash against reality, as investor sentiment turns.” She’s not alone in that assessment: Many experts have warned that crypto isn’t really a replacement for actual currencies, that its boom is being fueled by a runaway stock market, and that many investors are blindly embracing a new technology whose risks they don’t really understand.

Still, Rasmussen argued that “if you believe our lives are getting increasingly digital… there’s very good reasoning for why there should be a digital store of value like bitcoin.” It has proven secure so far: People have been trying to hack the blockchain technology on which bitcoin operates for years to no avail. It’s untethered to any one government. And now big institutional investors are jumping on board.

“You have CEOs of firms like BlackRock, which is the largest asset manager in the world, saying that they think that bitcoin is a ‘flight to quality’ asset similar to gold,” Rasmussen said.

Update, March 5, 10:40 am: This story has been updated to reflect that the price of bitcoin has hit a new all-time high.