Bitcoin most recently soared above $105,000, and stimulus organizers are now wondering whether $110,000 is within their sights. This remarkable rally is powered by several key factors. Rising institutional investment and the mechanics of Bitcoin’s fixed supply are two key driving factors. Knowing these forces at play is important to anyone who hopes to engage with the speculative, often murky universe of crypto and blockchain.

Institutional Investment: A Key Catalyst

Meanwhile, institutional investors are just beginning to play an increasing important role in the Bitcoin market. MICROSTRATEGY, BLACKROCK, ARK INVEST, AND FIDELITY HAVE ALL MADE STRATEGIC MOVES. These measures have had a drastic impact on Bitcoin’s price and overall market sentiment. Their participation is a clear indication of Bitcoin’s growing legitimacy as an asset class.

The Players and Their Strategies

Noteworthy is Cathie Wood’s ARK Invest which recently tripled its Bitcoin investments, allocating funds for the long-term growth potential of cryptocurrencies. Corporate Bitcoin investor, Michael Saylor, one of the most vocal proponents for Bitcoin, focuses on its use as an inflation hedge and must-have investment asset. These high-profile endorsements and enormous investments play into Bitcoin’s credibility and allure. Furthermore, the diversification strategies employed by institutional investors in 2024, exploring Bitcoin-linked assets, have amplified the growth of the Bitcoin market. Beyond the speculation and hype, there’s a real interest in tokenized assets. Over the next two years, they intend to invest in and tokenize their own assets, which could further catalyze investment into Bitcoin.

Spot Bitcoin ETFs: Opening the Floodgates

The approval of spot Bitcoin ETFs in the US has truly changed the game. These ETFs have made it easier for pension funds and family offices to include Bitcoin in their portfolios, broadening access for mainstream investors. Hedge funds and asset managers have overwhelmingly chosen ETFs to gain exposure to Bitcoin with their trades. This move away from directly purchasing coins underlines Bitcoin’s increasing profile as a developed investment asset.

The Impact of ETF Inflows

ETF inflows are hitting record highs, which is indicative of a massive increase in bullish investor sentiment. Bitcoin’s price has managed to retake and stay above $90,000 and $100,000. The Bitcoin market is highly speculative and volatile by nature. The constant flow of new money into products like IBIT shows that ETF inflows have the ability to stabilize the market. Despite their relative novelty, Spot Bitcoin ETFs have been an astounding success, welcoming in nearly $41.13 billion since their release in January 2024. ETF inflows jumped from around $12 billion per month to $40 billion per month in slightly over a year. This rapid growth is indicative of the increasing number of investors who are recognizing Bitcoin as a legitimate investment vehicle.

Supply Dynamics: Scarcity Drives Value

Bitcoin’s inherent scarcity is one of the primary factors driving its price. Conventional currencies do not have a fixed supply, but Bitcoin does, limited to 21 million coins. This finite supply, potentially manipulated by the threats of so-called miners, combined with surging demand provides tremendous upward pressure on its value.

The Halving Effect

The Bitcoin halving event occurs about every four years. This mining event greatly constrains the flow of new bitcoins entering circulation. Mining rewards are cut in half with each halving event. This slow, regular decline in the rate at which new bitcoin are produced increases scarcity and has led to price increases in the past.

The HODL Mentality and Illiquid Supply

It’s not just a trend – many Bitcoin investors adopt the “HODL” mentality, which stands for Hold On for Dear Life. This approach drastically limits the circulating supply of Bitcoin. The result is that more investors are choosing to HODL their Bitcoin. Third, this trend lowers the available supply of liquid Bitcoin, which should put more upward pressure on the price. As of the end of May 2021, the supply of illiquid bitcoin has increased by almost 371,000 BTC. This rapid growth is a result of the major decline in bitcoin’s supply currently available on exchanges. Bitcoin’s supply is continuing to move into more long-term holders. This shift is evident from the currently high levels of long-term holders. The HODL metric suggests that Bitcoin’s illiquid supply is currently growing at a rate that exceeds new supply exiting into circulation. Such continued growth only serves to embellish the narrative of scarcity that pervades Bitcoin.

Potential Risks and Considerations

These factors driving Bitcoin’s rally are equally compelling. We need to recognize the danger and be ready for the possibility of a near-term correction. The cryptocurrency market is volatile by nature. This is especially true for Bitcoin.

Volatility and Market Swings

Bitcoin’s extreme volatility is well-known, with many large ups and downs in the market history to date. To give some perspective, on April 18, 2021, Bitcoin was valued at $56,350. Just weeks later, it plummeted to a quarter of that price. This built-in volatility underscores the need for tremendous caution and risk management.

The Overbought Market

The recent spike in Bitcoin price, up almost eight times in 1 year, could mean bitcoin is overbought. As we’ve seen in other regions, such rapid appreciation is often unsustainable and can lead to a classic boom-bust cycle. Investors need to be cautious of excessive dependence on one asset class and look to diversify their portfolios to reduce risk.

Security and Access Risks

Holdings in these online “wallets” are not government insured. This means that you can be cut off from access to your money at a moment’s notice. A number of investors have lost fortunes recently because they have lost the password to their digital fortune or have been hacked. The total market value of all cryptocurrencies combined can vary wildly. Something happened in May that came like a tsunami and wiped nearly $1 trillion off their total value. An investment that is worth thousands of dollars today might fall to just hundreds tomorrow. This situation unfortunately is a precursor for catastrophic loss.

Going forward, investors should embrace Bitcoin while at the same time being wary of the opportunities this innovative tech and new market brings. Even as this current rally is underpinned by formidable fundamentals, a wary eye and a diversified portfolio will be necessary on the journey through this changeable market.