When it comes to Bitcoin — and all cryptocurrencies, especially now — a deep breath is in order before one invests.
Bitcoin hit an all-time closing high on Thursday at $69,294, an astonishing rebound from a crash in 2022 that saw the cryptocurrency fall 77% to $15,800.
Many assumed the mania would kill bitcoin and other cryptocurrencies generally. Some muttered or yelled words like "Good riddance."
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By the end of 2023, however, bitcoin was back in a big way, closing up 172% on the year to around $43,000. It has risen 61% just this year. And most of that gain started in February.
No doubt a terrific gain, although Nvidia (NVDA) is up 77% on the year at $875.28. And that's despite a 5.6% slump on Friday.
Bitcoin enthusiasts and promoters are ecstatic with its performance, convinced it's heading to $100,000 and ultimately will vie with gold as a way to hedge one's wealth against inflation and economic turmoil.
Skeptics abound, worried bitcoin is getting way too expensive and potentially ruinous to naive investors.
The late Charles Munger of Berkshire Hathaway (BRK.B) had no use for Bitcoin. Cryptocurrency traders were participants in a get-rich-quick scheme, contributing little to civilization, he told one interviewer.
JPMorgan Chase CEO Jamie Dimon has called Bitcoin a fraud, worthless and no better than a pet rock.
There's no disputing its volatility. An example: Bitcoin jumped nearly 8% on Monday, dropped 8.6% the next day and rose 8.5% on Wednesday.
By many traditional momentum measures, bitcoin at current levels is overbought and increasingly vulnerable to an abrupt selloff.
Its relative strength index has been largely above 75 since early February, a key measure on whether an investment is overbought.
And yet, bitcoin has enjoyed a huge runup this year. Blame two very specific factors.
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The ETFs arrive
First, after years of intense lobbying and litigation by Wall Street, nine exchange-traded funds were launched in January aimed at making it easier to invest in bitcoin. (More are expected later.)
Exchange-traded funds are organized to invest in pools of something, usually stocks. In this case, the ETFs were organized to buy into bitcoin and take the risk and costs of taking positions in the crypto off investors' hands.
The ETFs have pulled in more than $52 billion in new money in about two months, far faster than Eric Balchunas of Bloomberg Intelligence was expecting. Balchunas, who covers crypto news, told CoinDesk TV he thought it might take three to six months to generate that much cash.
ETFs built around gold took three years to pull in that much cash.
The ETFs have all had terrific runs since their opening day of trading on Jan. 11, rising roughly 48% to 52% each.
The iShares Bitcoin Trust (IBIT) , managed by money-management giant Blackstone, is up 48.5% since Jan. 11.
The biggest ETF, the Grayscale Bitcoin Trust (GBTC) , is up 52% since January.
The S&P 500 is up 8.1% this year. The Nasdaq-100 Index, which includes Nvidia, is up 7.4%.
The halving is coming in April
In April comes the second big influence on the price of bitcoin. It's called halving and works because of the way bitcoin is structured.
Every transaction is registered in a block and verified by solving complex math problems using computers. Once the problems are solved, the block goes at the end of what's called the blockchain.
When a block goes into the chain, as Quartz explains, it creates a number of bitcoins. Whoever gets a block into the chain gets rewarded with 6.25 bitcoin. Each coin is worth about $388,000. In April, the reward rate is expected to be cut in half to 3.125 bitcoin.
The halving, which occurs every four years or so, is expected to occur around April 21 and will fuel a bitcoin price jump.
Aaron Arnold, the co-founder of influential crypto markets channel "Altcoin Daily," believes prices could hit $80,000.
That's because halving is designed to create scarcity. it's like gold, which has a limited global supply and has evolved into an asset investors can use as a hedge against inflation and over-speculation.
Bitcoin was designed to have a limited supply. The original code that created it allows a maximum of 21 million coins, which might take several decades to distribute.
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This explains why Cathie Wood, CEO of ARK Investment Management, sees one bitcoin worth $2.3 million sometime in the future. She has also more specifically predicted it would rise to $1.5 million by 2030.
ARK Invest manages the ARK 21Shares Bitcoin ETF (ARKB) , up 48.4% since trading started on Jan. 11.
Wood assumes that Bitcoin will become so valuable that it will represent something on the order of 19% of global investable assets.
What is Bitcoin for
Wood's projection tells us something about what Bitcoin is not and what Bitcoin is.
- Bitcoin is not a currency. No matter what anyone tells you, especially crypto supporters. It's hard to buy a house, a car, dinner at a good restaurant using bitcoin.
- Bitcoin is, in fact, a vehicle for speculation.
Bitcoin also tends to track some stock indexes, especially the Nasdaq-100 Index.
And it crashes, like the 77% crash in 2022. Another crash that started in late 2017 saw bitcoin fall 84% over the next year.
It displayed its volatility briefly in January, rising 10% in the first eight days on the month and falling 16% over the next 15 days.
The chance to make huge gains in short periods of time attracts many naive investors, many Bitcoin critics argue, including Burton Malkiel, author of the influential book A Random Walk Down Main Street.
"I can assure you if it goes up to a new high, you’re going to draw people in the FOMO crowd," he told Sara Silverstein, editor-in-chief of theStreet. "I can’t miss this, and I’m afraid a lot of people are going to be hurt."
"I'd pass on Bitcoin for now, despite setting a new high for a fleeting moment. There are more prudent investment opportunities," Adam Spatacco wrote on the Motley Fool.
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