Bitcoin is on a roll. The granddaddy of cryptocurrencies has soared by over 110% in the past year, per CoinGecko data. It pushed above the $50,000 mark on Valentine’s Day for the first time since December 2021. So far, it’s stayed there. And some analysts are optimistic it might go higher.
The strong performance is a relief to those crypto investors whose portfolios dropped dramatically in the 2022 market crash. Even so, Bitcoin remains a long way from its high of almost $68,000 in November 2021, and still faces some serious headwinds.
What’s driving the surge?
Two of the biggest reasons for the price rise are the SEC’s recent approval of a spot Bitcoin ETF and speculation around the impending Bitcoin halving.
1. Upcoming Bitcoin halving
In a few months, Bitcoin miner rewards will be cut in half. It’s something that happens roughly every four years, and historically, Bitcoin’s price has risen after each one. Investors are speculating this will happen again this time.
The last halving was in May 2020, when the reward for mining a new block was cut from 12.5 BTC to 6.25 BTC. Around April, the block reward will fall to 3.125 BTC. It’s a way of maintaining scarcity and combating BTC inflation, and it can also generate attention.
Without getting too technical, the Bitcoin blockchain is a huge network of connected packets — or blocks — of information. Miners earn BTC when they add a new block of validated transactions. Halving is the built-in mechanism that slows the speed of production.
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2. Spot Bitcoin ETF approval
In January 2024, the SEC approved a handful of spot Bitcoin exchange-traded funds (ETFs). In some ways, this was a game changer for cryptocurrency because it adds legitimacy and removes some of the barriers for investors. Not least because you no longer need an account with a crypto exchange to buy Bitcoin. Several observers predict this will lead to high in-flows of money into crypto.
The approval means investors can access Bitcoin directly from their brokerage account. This includes retirement accounts such as IRAs. Some people may also be able to include it in their 401(k)s. Retirement fund managers and institutional investors managers may add the spot ETF to their lineups. Not only that, but it solves potential custody concerns and gives investors more protection.
Is crypto staging a comeback?
The crypto community is understandably excited about Bitcoin’s recent performance. Some Bitcoin bulls such as Rich Dad, Poor Dad author Robert Kiyosaki, believe Bitcoin will reach $100,000 this year. I take these predictions with a grain of salt. People have been making these kinds of claims about Bitcoin for years. Moreover, a price surge doesn’t solve the challenges Bitcoin faces.
It’s certainly true that the crypto market is shaking off the ice after a long winter. It’s also true that Bitcoin’s halving may push its price higher. However, the market has changed a lot since the last halving. Speculation and a higher presence of institutional investors mean gains are often baked in before the event takes place. Plus, CoinDesk also points out that the magnitude of the price gains gets smaller with every halving.
Moreover, for long-term investors, immediate price movements are only part of the picture. The real question is what cryptocurrencies might do in the coming decade or more. And that depends on how the technology develops, the impact of regulatory changes, and wider economic factors.
Crypto is still a high-risk investment
Putting aside the bullish price predictions, cryptocurrency continues to be a risky and volatile investment. There are several regulatory and technical hurdles the industry needs to overcome if it’s to reach its potential. On top of which, the collapses of several high-profile crypto exchanges hit investor confidence hard.
The regulatory issue is a biggie. The SEC’s cases against several top crypto exchanges are ongoing. The main thrust of its case is the accusation that they’ve been trading unregistered securities. It believes that some cryptocurrencies should have registered with the SEC and follow its rules on reporting and other matters. If the courts agree, it could seriously hamper crypto investors’ activities in America.
There’s a related question of investor protection. Unlike money in a bank account, cryptocurrencies are not covered by FDIC insurance. SIPC insurance does not apply to cryptocurrencies held in a brokerage account. (Though it does apply to ETFs). Put simply, crypto held in a custodial wallet — such as on the platform you bought it from — is at risk if that exchange or brokerage fails.
One way to mitigate this risk is to move your assets to a crypto wallet that you control. Just be aware that if you lose the security info, you might lose access to your coins completely. Another is to buy into a Bitcoin ETF. In that scenario, it’s the fund, not you who needs to worry about custody.
Key takeaway
If Bitcoin’s recovery has made you wonder about a potential comeback, tread carefully. It is still a volatile high-risk asset. Make sure you understand the potential dangers involved, and only invest a small percentage of your portfolio in risky assets like cryptocurrency.
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