Bitcoin hits new records: what will happen next?

+70%: since the start of 2024, the price of bitcoin has been panicking. Result: the digital currency sets records. After last week, which crushed the previous one dating from November 2021 at $68,991, a new milestone was reached this Monday, March 11. At the start of the afternoon, the price of the cryptocurrency reached an all-time high of $72,385. This record caps a remarkable comeback after the dark days of November 2022, when interest rate hikes reduced risk appetite and cryptocurrency giant FTX had just filed for bankruptcy. Buying bitcoins on this type of exchange seemed to be nothing more than a fun and original way to get robbed.

Bitcoin is not the only one to recover: everything is on the rise. Stock markets around the world are near their peaks. The same goes for gold prices, which reached a new all-time high last Friday, at $2,195. Even bond prices are climbing after two difficult years. The catalyst is a combination of excitement about artificial intelligence, joy over the state of the global economy, and expectations of monetary policy easing.

Yet bitcoin is doing better than most assets. On January 10, the Securities and Exchange Commission, a US regulator, approved applications from 11 investment firms, including BlackRock and Fidelity, to create bitcoin exchange-traded funds (ETFs). These funds make it easier for ordinary investors to purchase cryptocurrency. Rather than opening an account with a specialized exchange, creating a cryptocurrency wallet, making a bank transfer and finally buying bitcoins, you now just need to connect to your brokerage account and buy an exchange-traded fund. The assets of the ten largest bitcoin investment funds today amount to around $50 billion. And the activity seems to be self-reinforcing: the more money flows in, the higher the price goes, the more people talk about bitcoin ETFs, the more money flows in, and so on. Bitcoin has jumped by almost 70% since the start of 2024. It remains to be seen what bitcoin returns will look like tomorrow.

The most recent price movements may provide some clues. The first theory behind the bitcoin price surge is that the purchases are essentially a broad bet on technological progress, with variations that reflect the prospects of the cryptocurrency itself. For example, as tech stocks soared in mid-2021, bitcoin crashed after Elon Musk posted negative tweets about cryptocurrency payments. Prices also fell in late 2022, even as stock markets rallied, due to the failure of FTX.

The other theory is that bitcoin is a kind of digital gold. After all, the supply is inherently limited, just as the supply of gold is constrained by the amount of the metal in the ground. None of these assets offer a return or generate profits. This theory fell out of favor in 2021 and 2022, when inflation soared and bitcoin collapsed, but last year the cryptocurrency moved closer to gold again.

Both theories may contain elements of truth. And a hybrid tech-stock-crypto asset could be useful in this way, especially if it is only slightly correlated with other assets an investor might hold. Because diversification between uncorrelated assets is the fundamental principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge. If investors buy into this argument, the price of bitcoin should continue to rise for some time.

So what will happen when the transition from cryptocurrency to a standard financial asset is complete? Let’s assume that bitcoin has been added to most investors’ portfolios. Let’s also assume that cryptographic technology doesn’t really catch on. In this world, bitcoin’s returns are probably like those of gold: there is a fixed quantity of bitcoin, and its price would increase over the long term at about the same rate as the currency’s stock. This implies regular single-digit returns.

The creation of a bitcoin investment fund may have sparked a frenzy of spectacular gains, but the future it portends may be slower and more stable.