Chief Investment Officer of Bitwise Matt Hougan issues a warning, saying that not all tokens experiencing a spike in value in the cryptocurrency market “deserve to be.”
Investors should view cryptocurrency projects with high valuations with caution, as the market is experiencing the “wealth effect,” according to Bitwise Chief Investment Officer Matt Hougan. He said that the market is seeing price hikes as a result of traders reallocating some of their Bitcoin holdings into other cryptocurrency ventures.
Hougan highlighted that investors are spreading their winnings across more dubious crypto tokens as a result of Bitcoin’s recent price spike, which could give them a false sense of legitimacy in a recent series of postings on X.
“Be cautious when venturing outside. Exuberant bull markets provide funding for numerous awful ventures, many of which are already trading at absurd prices.
It was stated that during the week leading up to March 7, altcoins outperformed BTC, headed by memecoins and cryptocurrencies with AI themes. Hougan emphasised that this is because investors’ confidence increased following a rise in their Bitcoin holdings, which encouraged them to choose riskier investments in the hopes of earning larger profits.
“Bitcoin makes crypto natives feel rich, so they look for more speculative assets to invest in,” he said. This occurs in the context of Bitcoin achieving fresh all-time highs on March 8 of $70,184.
Around the same time, it was reported that Charles Edwards, the creator of Capriole Investments, a digital asset fund and quantitative Bitcoin investor, thought the price of Bitcoin at its most recent peak was “fairly priced.” Hougan also disputed the popular narrative that highlights how surprising the enthusiasm is considering that Bitcoin has only increased by “a few hundred percent from the lows.”
He stated that the overall market capitalization of altcoins is what drives interest in the market rather than the percentage return of Bitcoin.
“The cumulative magnitude of the wealth effect, rather than the percentage return of bitcoin, is what ignites alt season. Moreover, bitcoin’s market capitalization has increased by $1 trillion since the lows in November 2022.
He clarified, however, that although the percentage gain had been bigger, significantly less wealth had been created during prior Bitcoin price spikes.
“If we compare this to previous cycles, the wealth created by the bitcoin rally at this point in the cycle was greater on a percentage basis but less so on an absolute dollar basis,” the author notes. Unknown cryptocurrency ventures are met with more scepticism due to the prevalence of scams in the market.
Immunefi, a blockchain security platform, said on December 28, 2023, that Web3 hackers and con artists in 2023 stole a total of $1.8 billion.
As AI becomes more prevalent, investors will likely find it harder to evaluate project founders and developers and decide whether or not to invest in a project.
Blockchain analyst Jesse Leclere of CertiK reiterated the warning that frauds are only getting more sophisticated and that people should be extremely watchful for well-done exploits.