Just two years ago, Bitcoin and many other cryptocurrencies plummeted after the very public collapse of the crypto exchange FTX and soaring interest rates that triggered pessimism in the market. But in 2023, investors started returning to Bitcoin, and their optimism has caused its price to surge 174% over the past year.
A combination of optimism about the recent launch of Bitcoin exchange-traded funds (ETFs) and an upcoming halving of Bitcoin — making it more difficult to mine the crypto — are driving its price higher.
Here’s why these two things are exciting crypto investors and a few things to keep in mind if you’re considering investing in Bitcoin.
Bitcoin ETF euphoria
For most of Bitcoin’s existence, the only way to benefit from the cryptocurrency’s price increases was to own the coin directly. For some investors, navigating buying a digital asset and figuring out how to store it safely was a big hurdle.
Some brokerages, like Robinhood, made it easier to buy Bitcoin, but casual investors were still somewhat confused about owning digital assets. But a lot of that changed when the first Bitcoin ETF launched in January, which directly tracks the price of Bitcoin. Now, any investor can easily buy an ETF that follows the price of Bitcoin in the same way popular ETFs track the S&P 500.
Here are the benefits of Bitcoin ETFs:
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You can buy it like any other stock in your brokerage account.
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You can liquidate it easily, selling the shares when you no longer want them.
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ETF tax rules are already in place, while crypto tax rules are still confusing.
This simplicity makes it easier for everyday investors to dip their toes in crypto investing, opening up Bitcoin to many more investors and driving the price higher.
The result is Bitcoin’s price surging nearly 38% since Bitcoin ETFs launched.
Bitcoin’s halving is about to happen
Bitcoin’s price is also climbing because the rate at which Bitcoin is mined will be cut in half next month. This event happens about every four years, making Bitcoin twice as difficult to mine as before.
There is a theoretical maximum supply of 21 million Bitcoins, which won’t be reached until around 2140. With Bitcoin becoming more difficult to mine as time goes on, it potentially makes current coins more valuable.
This is adding to the current Bitcoin optimism and likely driving the cryptocurrency higher.
There’s probably more volatility ahead
Like many other cryptocurrencies, Bitcoin is already prone to significant price swings. Since its inception, the cryptocurrency has seen multiple pullbacks of 75% or more of its value from peak prices.
And the upcoming halving could trigger the next significant drop. JPMorgan analysts said recently that Bitcoin’s price could fall to $42,000 — a decrease of 37% from today’s current price — after the hype surrounding the halving subsides.
If you’re thinking about buying a Bitcoin ETF anytime soon, here are a few things you should keep in mind:
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It’s best to keep crypto to 5% or less of your portfolio: Many experts recommend limiting crypto to no more than 5% of your portfolio. A smaller percentage is even better if you’re new to cryptocurrencies.
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Don’t invest money you can’t afford to lose: This is a general rule for any investment, but it’s especially applicable to Bitcoin because of its volatility. Can you handle a 20% drop in Bitcoin’s value? If not, you shouldn’t invest that money.
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Keep track of crypto tax rules: If you buy a Bitcoin ETF, the tax rules will be the same as any other ETF you own. But if you decide to own Bitcoin or any other crypto outright, you’ll need to declare that when doing your taxes.
Owning Bitcoin directly or through an ETF will take part of your portfolio on a wild ride. That’s not necessarily bad, but you should be prepared for the volatility and understand what you’re getting into before you begin.
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Bitcoin Recently Surpassed $65,000 — This Is Why Investors Are Excited was originally published by The Motley Fool