Bitwise’s Chief Investment Officer, Matt Hougan, has issued a warning to investors about the “wealth effect” happening in the cryptocurrency market. He advises caution when approaching crypto projects with high valuations, as traders are reallocating their Bitcoin holdings into other crypto investments, causing prices to rise across the market.
Hougan explains that Bitcoin’s recent surge in price has led investors to diversify their profits into more questionable crypto tokens, potentially giving them a false sense of legitimacy. Altcoins, particularly memecoins and AI-themed cryptocurrencies, have outperformed Bitcoin in recent weeks, as investors gain confidence and seek higher returns in riskier assets.
Hougan believes that crypto natives make money in Bitcoin, feel wealthy, and then search for more speculative assets to invest in. This trend coincides with Bitcoin reaching new all-time highs, reaching $70,184 on March 8. Charles Edwards, founder of quantitative Bitcoin and digital asset fund Capriole Investments, considers Bitcoin’s new high to be fairly priced.
Hougan challenges the discussion around the hype surrounding Bitcoin’s growth, pointing out that it has only increased by a few hundred percent from its lows. He suggests that interest in the altcoin market is driven more by the total market capitalization rather than Bitcoin’s rate of return as a percentage.
Furthermore, Hougan explains that previous spikes in Bitcoin’s price generated comparatively lower wealth, despite the percentage increase being higher. He emphasizes the importance of considering the absolute dollar scale of wealth generated in earlier cycles.
With the prevalence of scams in the crypto industry, investors are becoming increasingly skeptical of unknown crypto projects. In 2023, a total of $1.8 billion was lost to Web3 hackers and scammers. As investors scrutinize project founders and developers to determine the legitimacy of a project, the emergence of AI makes this task even more challenging.
Jesse Leclere, a blockchain analyst from CertiK, warns that scams are becoming more advanced, and users must remain hyper-vigilant against well-executed exploits.