Is Bitcoin currently in a bubble?

The price of bitcoin hit $120,000 on Monday in a surge that reflects both genuine enthusiasm about the integration of crypto into mainstream finance and firm-driven volatility, according to one Northeast cryptocurrency expert.

This raises the long-debated topic of whether the digital currency is in a bubble, said Ravi Sarathy, a professor of international business and strategy at the university’s D’Amore-McKim School of Business.

“It’s possible there’s a bit of a bubble building,” says Sarathy. “But there is an important context here.”

When it comes to bitcoin and bubbles, it’s never quite that simple.

Sarathy sees a number of things going on with the price of bitcoin. For one, bitcoin – and crypto more broadly – ​​is undergoing a process of legitimization, thanks in part to the Trump administration’s crypto-friendly approach, and the gradual adoption of so-called decentralized finance (or DeFi) by mainstream investors.

The Securities and Exchange Commission has cleared the way for major financial firms and asset managers to offer crypto-related financial products, specifically ETFs (exchange-traded funds) that will allow investors to hold bitcoin. The change in guidance signals to investors that it is safer to hold crypto assets as mainstream financial institutions begin to diversify into crypto.

“Portfolio managers now have the option to include assets like bitcoin and other digital currencies, which they buy to include as part of that high-risk, high-return basket,” says Sarathy. “It was not possible before.”

Sarathy says that the growing interest in crypto on the part of large firms is stimulating demand across the industry. There’s no reason to think that some of that demand isn’t just hype — many investors really believe in bitcoin fundamentals: mainly scarcity (the supply of bitcoin is limited to $21 million coins) and decentralization, he says.

“You have more and more demand building up for bitcoin from these institutional investors, but also from retail investors, who are starting to see that they can just go to Fidelity and give them funds to invest in a Bitcoin ETF,” Sarathy says.

The other force at play in the price of bitcoin, according to Sarathy, is the activity of so-called digital asset treasuries, companies that seek certain types of assets as part of their corporate treasury to hedge against inflation.

Perhaps the best-known digital asset treasury company is MicroStrategy, which began buying up bitcoin in 2020. It is now the largest corporate holder of bitcoin in the world, according to The Motley Fool, with holdings worth about $65 billion.

As of June, there are at least 126 listed companies with bitcoins on their balance sheets.

It’s possible, Sarathy says, that some of these larger companies are driving up the price of bitcoin.

“Many of these digital asset treasury companies are not necessarily experienced investors, and it is unclear how their fiduciary responsibilities are currently regulated,” says Sarathy. “This adds to market volatility and can be the precursor to a bubble.”

At the same time, several pieces of legislation that will establish industry standards and safety rails have many optimistic about the future of crypto. The “anticipatory surge” in the price of bitcoin, as Sarathy describes it, comes as US lawmakers prepare to advance legislation.

Three separate pro-crypto bills are being considered by the US House of Representatives. The GENIUS Act would create a regulatory framework to support the creation of stablecoins, which are a type of digital asset linked to another currency, such as the US dollar.

These include mandating that firms wishing to issue their own coins maintain a reserve of liquid safe assets to support the cryptocurrency; that holders are prioritized for repayment in the event of a bankruptcy; and that issuers comply with anti-money laundering rules and anti-terrorism sanctions.

The Senate is nearing a final vote on the GENIUS Act this week.

The House is also set to take up the CLARITY Act, a market structure bill that would establish a clear system for regulating cryptocurrencies. The bill includes mandates that cryptocurrency developers provide accurate, relevant disclosures of information regarding operation, ownership and structure; and that client-facing firms separate client funds from their own and address, among other things, conflicting interests.

Finally, the House is weighing a bill that would prevent the Federal Reserve from issuing its own central bank digital currency (CBDC), called the Anti-CBDC Surveillance State Act.

Although it’s been a big week for crypto, Sarathy expects the price of bitcoin to cool down in the coming days.

“Once the legislation has passed, I expect there to be a slight drop in prices because the positive news is already built into the price,” says Sarathy. “Crypto is highly volatile in the short-term, and sometimes in the medium-term, but long-term if you look at the long-term trend for bitcoin from 2009, it has risen very significantly. Institutional investors with that long-term view are not going to be as concerned about the price level today and short-term fluctuations.”