Since January 2024, it’s hard to find a better-performing stock than Strategy (MSTR -1.25%). It’s up a mind-blowing 450%. Using a strategy to accumulate as much Bitcoin (BTC -2.60%) as it can, it has far surpassed the performance of Bitcoin, which has risen only 167%.

During the summer, Strategy (the company formerly known as MicroStrategy) soared to 450. But since mid-July, storm clouds have appeared. Strategy now trades around $350. Should investors be worried?

The Bitcoin treasury company narrative is getting stale

One reason for concern is the change in sentiment in the crypto market. Bitcoin treasury companies like Strategy once looked innovative, imaginative, and forward-looking. Now, they just look like a gimmick.

Image source: Getty Images.

Companies — many of which have never bought Bitcoin before — are now raising hundreds of millions of dollars from outside investors to buy Bitcoin. In some cases, these companies are appearing out of thin air, with the help of a little financial sleight-of-hand. All told, more than 100 companies have now reimagined themselves as Bitcoin treasury companies.

S&P 500 chart by TradingView.

Strategy pioneered the Bitcoin treasury company model in 2020. Investors were willing to pay a premium for the company because the price of Bitcoin kept going up, and Strategy kept reassuring investors that it had found a clever new way to accumulate Bitcoin on the cheap.

Is Strategy valued correctly?

Compare Strategy’s Bitcoin holdings to its market cap, and you’ll see why it may still be overvalued. The company now holds 638,985 BTC worth about $75 billion. Its current market cap is $100 billion.

There’s still a gap, but it’s shrinking. And as investors attach less of a premium to Strategy’s Bitcoin holdings, the loss of confidence could pull down the price of Strategy until the gap disappears entirely.

I generally agree with this new way of thinking. Strategy’s ability to outperform Bitcoin for such a long period of time made little sense. How long could it really out-Bitcoin Bitcoin?

For now, I’m avoiding Bitcoin treasury companies. I’d rather get my exposure to Bitcoin by holding it directly.

A healthy rise in its core cryptocurrency and several positive new analyst notes were the key factors sending Cipher Mining (CIFR -4.28%) stock higher in recent days. The Bitcoin miner was up by more than 9% week to date as of Thursday evening, according to data compiled by S&P Global Market Intelligence.

A boost from Bitcoin

After something of a slump in August, Bitcoin has generally been on the rise in the current month. The Federal Reserve’s rate cut on Wednesday was only the latest catalyst pushing the No. 1 cryptocurrency higher.

Image source: Getty Images.

Prior to that, on Monday, analyst Michael Donovan of Compass Point assumed coverage of Cipher Mining, flagging it as a buy at a price target of $8 per share. The following day, Canaccord Genuity’s Joseph Vafi changed his take on the company by raising his price target substantially. He reset it to $13 per share from $9, maintaining his existing buy recommendation.

Vafi values Cipher Mining using a sum-of-the-parts method. One of its more valuable assets, in his opinion, is the Barber Lake facility. The analyst believes this mining operation is one of the most profitable in the cryptoverse, as it is extremely efficient and has relatively low power costs. The pundit also pointed to the 1,063 Bitcoin held by the company and its Black Pearl site as high-value holdings.

A happy surprise

It’s possible Cipher Mining is continuing to bask in the warmth of its second-quarter earnings, the results of which were published near the start of August. The company posted a surprise net profit (of $0.08 per share), which seemed to mitigate its significant revenue miss ($43.6 million reality versus the consensus analyst estimate of $50.6 million.

“I believe that the next big wave in crypto is going to be the convergence of AI and crypto,” said Silbert, who is the founder and CEO of crypto conglomerate Digital Currency Group, on a Tuesday panel.

And it’s not just the intersection of two of the buzziest buzzwords in tech that has Silbert excited. It’s a project called Bittensor, a decentralized marketplace for AI founded by Jacob Steeves, a former Google engineer.

Silbert is so excited about Bittensor that he’s started a new company called Yuma that’s dedicated to the protocol and its associated cryptocurrency TAO. “I want to open up the development and the access to AI and Bitensor is enabling that,” he said. “It is the thing that I’ve gotten most excited about since Bitcoin.”

Bitcoin to Bittensor

Silbert isn’t your average crypto evangelist. The billionaire first obtained his stock broker license at the age of 17 and worked in finance after he graduated college, including on marquee bankruptcies like those of Enron and WorldCom. In 2004, he founded what would become SecondMarket, a trading platform where users could buy and sell alternative assets, which he would later sell to Nasdaq.

In 2012, Silbert discovered Bitcoin and soon spun up a new company called Digital Currency Group, which included subsidiaries like the popular crypto news publication CoinDesk, a crypto trading and lending arm called Genesis, and Grayscale, a crypto ETF issuer. Digital Currency Group eventually sold CoinDesk to the crypto exchange Bullish, and, in July, Grayscale confidentially filed to go public.

Silbert’s crypto empire suffered significant setbacks amid the “crypto winter” that followed the collapse of the crypto exchange FTX, but he has since returned back into the public eye to boost Bittensor and Yuma, his new company dedicated to decentralized AI.

Major AI algorithms require mammoth amounts of computing power, and only large, centralized players like OpenAI, Google, or Amazon have the capital to compete. Bittensor tries to repurpose the same incentive mechanisms that power Bitcoin to encourage participants to lend their computing power to create a decentralized network of servers to power AI algorithms. Silbert’s Yuma helps different projects looking to make use of Bittensor’s network to power their AI applications. 

“In the way that the internet was the world wide web of information, Bittensor is creating the world wide web of intelligence,” he said.

The protocol was especially popular in the first half of 2024, when its cryptocurrency TAO notched an all-time high in March 2024 of $757. The token now trades at nearly $360 as of Thursday afternoon.

After turning in two straight years of triple-digit returns in 2023 and 2024, Bitcoin (BTC 2.27%) is on track in 2025 for its weakest performance since 2022. The world’s most popular cryptocurrency is down 6% over the past 30 days, and is only up 20% for the year as I write this.

So what’s going on? There are three possible reasons why Bitcoin is pulling back.

Reason No. 1: Overall macroeconomic weakness

For much of its history, Bitcoin has been uncorrelated with any major asset class. It could zig when other assets zagged. That made Bitcoin particularly attractive to investors. In just about any market conditions, Bitcoin could offer the potential for sky-high returns.

Image source: Getty Images.

But that may no longer be the case. In many ways, Bitcoin may be much more susceptible to overall macroeconomic conditions than once thought. In other words, Bitcoin will face much stiffer headwinds if jobs growth slows, if inflation further rears its head, or if tariffs lead to weaker overall growth. And that’s exactly what appears to be happening right now.

Bitcoin’s pullback makes sense if you consider how much attention it now garners from institutional investors. Just a few years ago, retail investors were driving the pace of Bitcoin adoption. But now it’s deep-pocketed institutional investors, and that likely explains the crypto market’s current obsession with potential Fed rate cuts. 

Reason No. 2: Investors are diversifying into other crypto assets

While Bitcoin still accounts for nearly 60% of the entire market cap of the crypto market, it’s hard to ignore how much interest other niches of the crypto market are now attracting from investors. At one time, Bitcoin was the only game in town for institutional investors. But not any longer.

Take, for example, the rise of so-called digital asset treasury companies. These companies do only one thing: Raise money from outside investors, and then plow that money back into one specific crypto asset. This summer has already seen the appearance of Ethereum, Solana, and XRP treasury companies. All of that is money that could have flowed into Bitcoin.

Or, for example, take the sudden interest in stablecoins. Recently enacted legislation will likely lead to a boom in stablecoin investment. According to a recent report from Citigroup, the size of the stablecoin market could balloon to $3.7 trillion within just a few years. This, too, is money that could have gone into Bitcoin.

This diversification away from Bitcoin into other crypto assets is not a new phenomenon. This is the same pattern, in fact, that the crypto market saw during the previous bull market rally of 2020-21. Bitcoin surged first, followed by Ethereum, and then lower market cap altcoins. Finally, there was an explosion of speculative excess into meme coins and non-fungible tokens (NFTs).

Reason No. 3: The Bitcoin cycle is running its course

That leads us to potentially the most concerning reason for Bitcoin’s pullback: The four-year Bitcoin cycle is running to where it usually drops. If you’re a Bitcoin investor, that’s the last thing you want to hear, because it means Bitcoin’s recent pullback may be a portent of things to come later in 2025.

There are no guarantees in investing, but if history is any guide, the Bitcoin halving every four years is the catalyst for a massive run-up in price. So far there have been four halvings, and the post-halving period of price appreciation typically has lasted anywhere from 12 to 18 months, followed by a classic “blow-off top”– a steep, rapid rise followed by a steep, rapid drop. In that scenario, Bitcoin reaches a new high all-time high before eventually collapsing in value. In 2022, for example, Bitcoin declined by a gut-wrenching 64% after hitting a new all-time high in November 2021 following the May 2020 halving.

The problem, quite frankly, is that Bitcoin’s most recent halving event took place in April 2024. That means we are now 17 months into the period of expected to be rapid price appreciation. In a worst-case scenario, there might only be a few months left before Bitcoin has another blow-off top, and the whole cycle begins anew.

Certainly, there are plenty of signs of this blow-off top in progress. Billions of dollars are being invested in highly speculative digital assets, money-losing businesses are rapidly transforming into digital asset treasury companies, new crypto companies are rushing to go public before the crypto IPO window closes, and Wall Street is rushing to reassure investors that “this time it’s different.”

So, if you are thinking of investing in Bitcoin now, remember to do your due diligence and keep your investment small. There are several very concerning signs that Bitcoin’s summer pullback might be a red flag for a difficult and tumultuous final quarter of the year.

The Bitcoin treasury company model pioneered by Strategy is going fully mainstream. In fact, Wall Street is now adapting this business model for other cryptocurrencies beyond just Bitcoin.

On June 30, Tom Lee of Fundstrat announced that he was becoming the chairman of BitMine Immersion Technologies, a tiny Bitcoin mining company. But here’s the twist: He’s going to transform that Bitcoin-centric company into an Ethereum (ETH 0.56%) treasury company. The company will buy Ethereum, not Bitcoin, for its balance sheet.

Tom Lee is very bullish on Ethereum. He recently told CNBC that he thinks Ethereum has the potential to become “the new Bitcoin.” Is he right?

Ethereum’s historical track record

To answer that question, all you need to know is that Ethereum has a stellar track record, and has often been highlighted as the one cryptocurrency capable of “flipping” Bitcoin. That is, Ethereum is the one cryptocurrency in the world capable of surpassing Bitcoin in market cap.

That’s due in part to the remarkable historical returns of Ethereum. When it launched in July 2015, Ethereum traded for less than $1. Ten years later, it trades for $2,595. That’s a head-spinning return on investment within a relatively short period.

Admittedly, Ethereum has been struggling of late, down 22% for the year. And it doesn’t show signs of turning around anytime soon, even with the support of the Trump administration, which made Ethereum one of the keystone cryptocurrencies for its new U.S. Digital Asset Stockpile.

The convergence of Wall Street and crypto

Tom Lee is not focused on the past, he’s focused on the future. And what he sees happening is a grand convergence of traditional financial services and crypto.

Historically, Ethereum has been the one blockchain that dominates the world of decentralized finance (DeFi), which is the blockchain version of traditional finance.

For example, Ethereum has a staggering 55% market share of total value locked (TVL), a key metric for measuring DeFi activity. No other blockchain even comes close. Solana only has a 7% market share. And Base, the blockchain launched by Coinbase Global, only has a 3% market share.

Image source: Getty Images.

When you look at the investments being made by World Liberty Financial, the crypto venture affiliated with the Trump family, they all seem to involve Ethereum or DeFi. Given that Ethereum is such a DeFi powerhouse, this makes sense.

This is important to point out because just about everyone admits that Bitcoin will never be a DeFi powerhouse. Right now, Bitcoin only has a 5.5% market share of TVL. So Ethereum is approximately 10x bigger than Bitcoin when you take into account only this one factor.

Stablecoins change everything

I’ve saved the best for last: Ethereum is also a giant when it comes to stablecoins. These stablecoins are cryptocurrencies that are pegged 1:1 to the value of another asset, usually the U.S. dollar.

These stablecoins are — you guessed it — extraordinarily important to decentralized finance. They are the easiest way for mainstream Wall Street institutions to gain access to blockchain-based yield strategies.

Moreover, stablecoins are becoming some of the biggest buyers of U.S. T-bills, since this government debt can be used to preserve the dollar peg. As a result, Treasury Secretary Scott Bessent recently predicted that stablecoins will become a $2 trillion industry within a few years.

As Tom Lee points out, roughly 50% of all stablecoin transaction activity is now taking place on the Ethereum blockchain, and roughly 30% of all transaction volume on the Ethereum blockchain is linked to stablecoins. So he sees these stablecoins driving tremendous value for Ethereum in the future.

Caveats for investors

All of this sounds fantastic, right? Investors get a cryptocurrency with a stellar track record. This cryptocurrency is also at the forefront of the fastest-growing sector of the crypto market. And this cryptocurrency has the direct attention of the Trump administration. What could possibly go wrong?

For one thing, Ethereum faces a tremendous amount of competition from other blockchains, many of which are also trying to become “the blockchain” for stablecoins. Tron, a competing blockchain with support from the Trump family, is second only to Ethereum for stablecoin transaction activity.

Also, keep in mind: Vitalik Buterin, the legendary founder of Ethereum, warned earlier this year that he doesn’t want the Ethereum blockchain to become a Wall Street casino. Even though the White House has made every signal that it wants to include Ethereum in its vision of crypto, there’s been little reciprocal show of support from Buterin.

Before you jump right in and assume that Ethereum will become “the new Bitcoin,” make sure you do your due diligence. Right now, Ethereum seems to be the frontrunner for this title, but there are plenty of other competitors out there in the crypto market.

The Y2K bug never melted the global grid, yet the panic-buying of flashlights and canned beans in the last months of 1999 was very real. Today, central bank digital currencies (CBDCs) could be playing a similar role in a different fear cycle.

CBDCs are digital currencies issued and controlled by a central bank, combining the convenience of digital money with the potential for state oversight of transactions. Talk of state-issued, fully traceable (and controllable) digital money has some investors looking for a lifeboat, and the main beneficiary this time could be Bitcoin (BTC -0.78%).

If you think a large and fearful capital flight to Bitcoin driven by CBDCs is improbable in the near term, you aren’t wrong. Nonetheless, it’s undeniable that a centralized and government-controlled digital currency could threaten financial privacy in a way that encourages certain investors to hold their funds in another form. There’s already some evidence that at least a few people are buying Bitcoin for this reason. Let’s dig in and understand this trend a bit more so that you’ll be prepared if it continues to take off.

China’s CBDC push may be driving investors out

China’s recent push to expand its digital yuan pilot projects is both a technical experiment and a catalyst for Chinese investors seeking to safeguard their financial privacy by seeking alternative currencies like Bitcoin. It’s also a good example of how capital can behave in a way that’s beneficial to Bitcoin when central bankers start to posture regarding implementing CBDCs.

On April 23, the People’s Bank of China urged state-owned enterprises to prioritize using the yuan for cross-border payments; the digital yuan is likely going to be promoted next. That move sent a clear message: The Chinese government is accelerating control over money and its flows, thereby spurring underground over-the-counter (OTC) purchasing of Bitcoin in cities like Shenzhen and Shanghai as investors scrambled to move capital offshore.

The dynamic echoes early 2023, when the start of one of China’s digital yuan pilot programs coincided with a 72% surge in Bitcoin’s price from January to April, reflecting a classic flight to a perceived safe asset. With around 94% of central banks now exploring CBDCs, according to data from the Bank of International Settlements, the same impulse that’s driving Chinese investors to Bitcoin could very easily spread internationally.

Image source: Getty Images.

Will the dollar go digital?

In the U.S., CBDC conversations are a mix of cautious exploration and staunch political resistance.

The Federal Reserve’s research into a digital dollar is ongoing. Yet on Capitol Hill, resistance is mounting. A bill reintroduced in late February seeks to bar the Fed from issuing a CBDC.

Furthermore, President Donald Trump’s executive order on Jan. 28 bans a “digital dollar” outright, but that could actually spur CBDCs in other countries, as they’ll be free to establish any norms they prefer for the currency category. So, U.S. investors aren’t exactly afraid of a new CBDC threatening their privacy or control over their funds. However, they could still capture the upside from investors in other countries buying Bitcoin to evade their nations’ CBDCs.

How far can the CBDC hedge push Bitcoin?

At the moment, capital flight into Bitcoin as a result of CBDCs is a trend that’s just starting to pick up. Still, it’s important to keep expectations in check here. Bitcoin probably can’t ever replace fiat currencies completely, whether they’re digitized or not.

Bitcoin’s supply is famously capped at 21 million coins. That scarcity can support price strength until the cows come home. But there are many technical hurdles to using Bitcoin as an actual currency rather than merely as a store of value. Everyday transactions are far too slow or too costly to be competitive with cash, even on throughput-specialized side chains like the Lightning network.

So while the CBDC debate may push Bitcoin higher to the extent it persists and intensifies, don’t expect a one-way rocket ride. Investors can count on a tailwind here as long as privacy fears persist. Still, there’s no wholly new reason to invest in Bitcoin any more than you’re already doing, unless you want to avoid using a CBDC in the future.