Investors are being cautioned by Bitwise’s chief investment officer, Matt Hougan, to approach crypto projects with high valuations skeptically. He warns that the “wealth effect” is taking place in the crypto market, with traders reallocating portions of their Bitcoin holdings into other crypto investments, causing price increases across the market.
Hougan explained in a recent series of posts on X that the recent surge in Bitcoin’s price has led investors to spread their profits across more questionable crypto tokens, potentially giving them a false sense of legitimacy. Altcoins, led by memecoins and AI-themed cryptocurrencies, have outperformed Bitcoin during the week up to March 7, according to Cointelegraph.
Hougan believes this is because investors, feeling rich from their Bitcoin investments, are looking for more speculative assets to invest in with hopes of higher returns. He stated, “Crypto natives make money in Bitcoin, feel rich, and then look for more speculative assets to invest in.”
These developments come as Bitcoin reached new all-time highs, reaching $70,184 on March 8. Charles Edwards, founder of quantitative Bitcoin and digital asset fund Capriole Investments, believes that Bitcoin’s new all-time high is “fairly priced,” as reported by Cointelegraph at the same time.
Hougan challenges the widespread discussion of the surprise and hype surrounding Bitcoin’s growth, pointing out that Bitcoin has only grown “a few hundred percent from the 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.
Hougan further explains that in previous cycles when Bitcoin’s price spiked, the amount of wealth generated was comparatively lower, despite the percentage increase being higher. He states, “By comparison, in earlier cycles, the amount of wealth generated by bitcoin rallying was smaller on an absolute dollar scale at this stage in the cycle, even though it was larger on a percentage scale.”
With the increasing number of scams in the crypto industry, there is a heightened sense of skepticism towards unknown crypto projects. In 2023, a total of $1.8 billion was reported lost to Web3 hackers and scammers, according to blockchain security platform Immunefi. As investors become more cautious, scrutinizing project founders and developers to determine their worthiness, the emergence of AI is expected to make this process even more challenging.
Jesse Leclere, a blockchain analyst from CertiK, warns that scams are becoming more advanced, and users should remain hyper-vigilant for well-executed exploits.
In conclusion, investors are advised to approach crypto projects with high valuations skeptically, considering the “wealth effect” in the market. Bitcoin’s recent price surge has led to the spread of profits across more questionable crypto tokens, giving them a false sense of legitimacy. Altcoins have outperformed Bitcoin, and investors are seeking more speculative assets for higher returns. However, caution is necessary due to the increasing number of scams in the industry.