What is driving bitcoin’s ride to new highs? Fears of more FOMO or inflation?

But validation is not the same as normalization.

This is a market whose recent rally follows a 53% drop earlier this year, with volatility far greater than gold or stocks. Bitcoin has yet to be tested by a prolonged economic downturn (or indeed high inflation), even though the idea of ​​a store of value separate from regular markets is attracting more investors. The need for more consumer protection grows as regulators open the door to more products.

There are certain forces that explain Bitcoin’s latest rally.

The first revolves around co-option. Washington DC and the financial sector are both looking to co-opt digital assets to their own end rather than eliminate them entirely. The US approval of bitcoin ETFs – even if based only on futures – may confuse the volatility of the crypto with some traders. This is in contrast to the hawkish tone against uncontrolled crypto product launches or ransomware attacks fueled by bitcoin. And it’s a far cry from China’s recent sweeping ban on crypto, which has sent the bitcoin mining industry on a mission to set up shop in states like Texas.

Second, the surrender is in contrast to what happened during the sell-off earlier this year, when investors gave up their holdings amid widespread panic that price levels had gone too high. Today’s hype about bitcoin demand means that bad news – including doubts about the asset backing the popular stablecoin Tether – fails to register and only squeezes the price higher. Talk of hedging against inflation ignores gains like stocks that attracted hedge funds in the first place.

The third force is competition. It speaks to FOMO – the desperation of those who are in for a shot at climbing the crypto ladder or beating their peers. A survey published on Wednesday by the UK Financial Conduct Authority found that 76 per cent of young people investing in high-risk products felt a sense of competition with friends, family and other acquaintances. A false sense of security is also contributing – 69% wrongly believed that crypto was a regulated asset.

“As a result, they were unlikely to understand the lack of investor protection and the risk to their money,” wrote the regulator, which has not approved exchange-traded crypto products. Bitcoin still looks like a machine you only live trade once.

Now consider that options on ETFs will allow investors to double bets for or against the fund. Eric Balchunas of Bloomberg Intelligence says, “Retail-YOLO types will be able to trade calls on bitcoin for the first time in regulated financial markets. This could be a costly lesson in burnt fingers. The narratives shared on social media, where Beliefs are reinforced, and reflected, contribute to risk-taking; this is where the crypto overlaps with stocks such as Gamestop Corp., where at one time some 900,000 retail accounts trade it as a crowdfunder. Were were

Consumer protection should be a priority for Sentinel as they race to expand digital assets. The ballooning of crypto in the post-lockdown economy has raised the stakes for those trying to spread the bitcoin gospel of Holding on Dear Life (HODL). More Americans are dedicating a substantial portion of their purchasing power to cryptocurrencies than almost every other country, according to Chainalysis, which found that more than $750 billion in crypto was transferred to North America between June 2020 and July this year. was sent in.

What the crypto crowd needs is caution. Rather than trying to find new exaggerations to describe bitcoin’s all-time high, the words of Scott Minerd of the Guggenheim, who exited his bitcoin position during the sell-off earlier this year, may be worth noting: “ Discipline tells me now that I don’t fully understand it.” He is not alone.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He previously worked for Reuters and Forbes.