Bitcoin (BTC-USD) continues to break records in 2024 after a brutal crypto winter that started two years earlier. The world’s largest cryptocurrency topped $100,000 for the first time on December 4 and remained in the plus-$100,000 range until the next day. Since then, the price of Bitcoin has fallen slightly.
The price of Bitcoin, which has now risen more than 35% since the presidential election, crossed the $70,000 mark for the first time in March 2024. The driving force behind this surge was the SEC’s approval of new bitcoin spot ETFs, or exchange-traded funds, that made it easier to invest. in bitcoin with a brokerage account, or even a retirement account.
Bitcoin’s price hit the $70,000 mark again when the first Ethereum ETFs began trading in July after receiving the green light from the SEC two months earlier.
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In early 2023, a Pew Research Center survey found that 75% of Americans who had heard of cryptocurrency said they had no confidence in its security or reliability.
But the price of the world’s largest cryptocurrency began rising again later that year after a federal appeals court ruled that the SEC improperly denied an application by Grayscale Investments to convert its Grayscale Bitcoin Trust into a spot bitcoin ETF. The SEC said in October 2023 that it would not appeal the court’s ruling.
And in January, it authorized nearly a dozen new exchange-traded funds called spot bitcoin ETFs. Spot ETFs own the underlying asset – such as gold, silver or now bitcoin – and closely track its price, minus trading costs or fees.
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“There haven’t been ETFs like this before,” said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. “There are ETFs that invest in shares of companies that do business in the crypto industry, such as exchanges and miners, and there are ETFs that trade futures in bitcoin, which is like buying stock options instead of shares, but until now so far that is not the case. have been all ETFs that invest directly in and own bitcoin.”
The SEC’s decision allows investors to gain direct exposure to bitcoin without going through a crypto exchange or the headache of storage or security issues. Instead, investors can easily gain exposure to bitcoin by owning shares in their investment accounts, including individual retirement accounts (IRAs).
“The new spot bitcoin ETFs are widely seen as the safest from a custody perspective because the ETFs are regulated by the SEC and they handle the protection of your bitcoin for you,” Edelman said.
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With all the hype surrounding Bitcoin, it’s understandable that you might be tempted to buy in. But there’s a lot you need to know first before trying to take advantage of the volatile price.
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Bitcoin and other cryptocurrencies are speculative investments, which are assets that people put money into in the hope that the price will rise quickly. Sometimes speculative assets are called non-productive assets because they do not generate income such as interest, dividends or income. Investors who buy speculative assets typically try to profit from short-term price fluctuations.
“Normally the way you think about a financial asset is that you are providing capital to the company,” says Michael Finke, professor of asset management and holder of the Frank M. Engle Distinguished Chair in Economic Security at the American College of Financial Services. . “The company uses that capital to make something, and people buy it. That creates profit. You can value the company based on the profitability you expect in the future. With bitcoin it doesn’t yield anything, so the valuation is completely speculative.”
That might not seem like a big deal if you’ve seen the price of bitcoin climb higher and higher over time. Who needs dividends or interest since the price of Bitcoin has risen over 600% in the last five years?
You might think that the price of Bitcoin can keep rising forever. After all, the stock market has a solid track record of rising over long periods of time. But keep in mind that unlike a company you might buy shares in, Bitcoin doesn’t create a product or service that people actually use. Even as a payment method, its use is extremely limited.
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Furthermore, much of the wealth historically generated by the stock market has come from reinvestment rather than from rising stock prices. As dividends are reinvested — which usually happens automatically in most 401(k)s and many automated investment accounts — you buy more shares, allowing your money to compound and earn even more over time.
According to research from Hartford Funds, about 69% of the S&P 500 index’s total returns between 1960 and 2022 came from dividends rather than stock price gains. Put another way, a $10,000 investment in the S&P 500 in 1960 would have been worth more than $4 million by the end of 2022. But without reinvestment and compounding of dividends, the same investment would have been worth only about $641,000.
Because bitcoin and other cryptocurrencies do not produce dividends, the returns you earn will have to come from price increases alone.
“People are often attracted to things that have been on the rise lately,” Finke says. “And that is attractive for anyone who invests, but especially for those who tend to be more sentiment-driven investors. They see the price rising and think they want to be part of it. There is always that fear of missing out.”
The price of Bitcoin remains highly volatile
Bitcoin is much more volatile than the overall stock market. That can be exciting if the price is on a tear, as we have seen in recent months.
But when times are bad, the price of Bitcoin often falls much faster than that of stocks. Take 2022, which was a terrible year for stocks overall, as the S&P 500 plunged about 19%. In the same year, bitcoin lost more than 60% of its value.
Edelman emphasizes that bitcoin is highly speculative, with a history of volatility, but he believes its potential makes it suitable for a long-term portfolio, provided investors limit this to 1% to 5%.
“The risks are high, and if it fails, a low single-digit allocation will not cause material damage,” he said. “And thanks to the potential for outsized returns, a small allocation can have a big impact on your overall investment returns.”
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Still, a common reason to invest in bitcoin and other cryptocurrencies is portfolio diversification. By spreading risk across multiple asset classes, you can reduce the overall risk of major losses.
The relationship between stock and cryptocurrency prices has long been debated. But recent research suggests that stock and bitcoin prices are becoming increasingly correlated, meaning they are moving more and more in the same direction.
A 2023 working paper from the International Monetary Fund states that bitcoin and stock prices “are fairly uncorrelated before 2020, and increasingly correlated from the second half of 2020.” One possible explanation is that institutional investors are more likely to have exposure to both bitcoin and stocks.
Researchers at Georgetown University found a growing correlation between bitcoin and the S&P 500, especially in times of crisis. The article states that the correlation “increased significantly during COVID, the Russian invasion of Ukraine, and the crypto winter, indicating that Bitcoin has failed to serve as a hedging asset during these events.”
Don’t expect your 401(k) manager to start offering bitcoin anytime soon. Fidelity and a smaller administrator called FORUSALL both offer employers the option to let plan participants invest a small portion of their retirement money in cryptocurrency.
But Finke doesn’t expect plans to make crypto widely available to employees, even with the new bitcoin ETFs. Plan sponsors have a fiduciary duty, which means they are obligated to act in the best interests of participants. One of those responsibilities is to minimize the risk of significant losses.
“Plan sponsors are very cautious and their consultants are very cautious about adding investment options to the core menu of a plan,” Finke said.
The U.S. Department of Labor has even warned 401(k) plan administrators to be cautious before offering crypto assets in their retirement plans, noting in a March 2022 memo that it “can be extremely difficult, even for knowledgeable investors , to evaluate it. assets and separate the facts from the hype.”
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Ultimately, investing in bitcoin is a personal decision, whether you buy ETFs or real digital coins. If you decide to invest, you should have an already diversified portfolio of assets, such as index funds. Typically, you don’t want to invest money in speculative assets that you can’t afford to lose.
Before you buy bitcoin, think about what motivates you: Do you believe bitcoin has potential long-term investment value? Or is there FOMO, or the fear of missing out?
“Investors who are attracted to shiny things because they have appreciated a lot recently tend to be consistently punished,” Finke said. “This recent rise in Bitcoin seems like a perfect example of a shiny object that has attracted a lot of attention from investors, but may not perform well in the future.”
