Warning! Bitcoin Madness: One of the Biggest Advantages May Also Bring the Biggest Risk

Growing enthusiasm for bitcoin’s value has attracted new investors and boosted its price this year , but that enthusiasm — even mania — may also present the cryptocurrency ’s biggest risk.

Part of the reason Bitcoin ( BTC -USD) appeals to many investors is that it is seen as a store of value. That is, it has value because people think it has value.

While long-term Bitcoin buyers may believe that the cryptocurrency will become a valid alternative currency or that blockchain is a technology that will fundamentally change the world in a variety of ways, many other buyers - especially recent ones - are in for one simple reason: It just keeps going up.

“Sentiment translates into demand, and demand determines market movement. Sentiment around Bitcoin has never been as strong as it is right now,” said Meltem Demirors, chief strategy officer at digital asset manager CoinShares, in an interview with Yahoo Finance Live.

That sentiment is evident in the price of bitcoin, which hit a new all-time high this week above $52,000. That puts its one-year return at more than 400%, and more than 75% in 2021 alone.

This is also evident in the number of new entrants, with Bitcoin addresses (addresses that receive or send Bitcoin) reaching a record 35.6 million in January, according to Block/Glassnode data. CoinShares data shows that Bitcoin saw an inflow of $367 million in the week ending February 15.

But the higher the price of Bitcoin goes, the stronger this fear of missing out becomes. Risk-taking behavior may ensue, leading to internal and external risks.

“My main concern is that when markets get overheated, and they do tend to get enthusiastic, we see a lot of leverage and capital becomes expensive,” Demirors said. “Whenever leverage is taken out of the market, we see more drawdowns, and that raises concerns.”

Of course, bitcoin investors have been through this before, most dramatically in late 2017 when the cryptocurrency plunged from a then-record $19,000 to $4,000 in December in the space of a week. Even if they don’t believe such a crash will happen again, the memory lingers and has cemented bitcoin’s reputation as a volatile instrument.

While it didn’t see a drop of the same magnitude, Bitcoin did retreat from highs around $40,000 in early January, hitting below $30,000 a few weeks later before bouncing back.

Such volatility remains a risk in the eyes of JPMorgan strategists, who said earlier this week that bitcoin’s rally will not be sustainable unless price volatility calms down. (FX168)