Bitcoin At $100K: Speculation Or Solid Fundamentals?

The buzz around cryptocurrencies is back with Bitcoin prices getting a boost this year and investors and the media renewing their interest. To a retail investor though, the question of particular interest is: What has changed fundamentally in the cryptocurrency arena to help Bitcoin prices swell more than 120% in the last twelve months?

The Bitcoin growth story does not end here. There is growing chatter about Bitcoin potentially breaching the $100K mark. Which, given the current price around $61,000, that would be a move of over 60% over several years. What remains to be seen is whether this story plays out the same way oil prices did during the 2008-09 financial crisis (the number 100 does tend to spook investors), or if the Bitcoin story has an altogether different ending.

The Bigger Picture

In general, investment assets are difficult to price using static demand-supply models. This is particularly true for cryptocurrencies. But, as in the case of any investment asset, expectations about demand and supply positions could help point in the general direction. Notably, Bitcoin prices over the years have primarily been driven by the perception of how a particular piece of news boosts or hurts the potential number of Bitcoin users and their transaction volume in the long run.

In this context, Bitcoin’s demand position is primarily driven by two factors:

• the number of active users
• how much they transact.

On the supply side, the number of available Bitcoins is capped, and almost 94% of the capped number is already mined. With limited supply side upside, it is sensible to focus on the demand – both in terms of users and transaction volumes.

Have any of the demand side factors really changed?

Several of them have!! The market has been making the right noises that paints a positive picture for crypto demand over the long term.

The first factor is the renewed belief that Bitcoins are a real substitute for the US dollar as a dependable exchange currency as well as asset class – especially with the uncertainties and doomsday stories surrounding the strength of the US dollar.

Renewed support of the political class is a close second factor, with both Trump and Harris coming out openly in support of new technologies and digital assets. This strengthens the belief that US government policies are likely to remain favorable for Bitcoins and other cryptocurrencies going forward. In fact, over the last few years, adverse government actions and statements were key constraining factors in the movement of crypto prices. Additionally, it seems that major economies around the globe are slowly coming to terms with the crypto movement as there has not been any major adverse policy action in the recent past.

The third factor is the risk psychology of retail investors who find comfort in a new asset class when larger institutional investors take positions in it. In this aspect, the introduction of Blackrock’s spot Bitcoin ETF is believed to have been a game changer with the fund being one of the fastest growing ETFs in the last few months. This has helped retain investor perception in 2 key ways:

1. it multiplies investor confidence on Bitcoins as a long-term asset
2. it indicates the increasing number of open positions and active users of Bitcoin – both strong demand side positives.

Does Bitcoin look attractive now?

Overall, the performance of Bitcoin over the years has been extremely volatile. Returns for the asset were 60% in 2021, -64% in 2022, and 155% in 2023. In fact, consistent returns – in good times and bad – has been difficult over recent years for any single asset class. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current demand-supply dynamics, could Bitcoin be relegated to being a promising but underperforming asset class over the next 12 months – or will it see a strong jump to scale $100K?

Why the $100K mark is of interest

Interest on Bitcoin options at around the strike rate of $100K has been enormous as indicated by the jump in open interest at this strike. Any position is a two-way traffic where someone is willing to sell and someone is willing to buy. But increasing strike positions definitely signals an upward momentum.

Some of the positions are bound to be speculative in nature and such speculations would keep Bitcoin prices volatile and risky for short term investments. However, if the demand for Bitcoin holds up, it is a matter of time before Bitcoin prices cross the $100K barrier.

[1] Returns as of 10/4/2024
[2] Cumulative total returns since the end of 2016

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