It seems anyone you speak with is talking about how much they have in a particular “crypto” or how they want to own crypto. What is driving the latest interest in the sector?
The best known of the cryptocurrencies is Bitcoin (BTC), so let’s use BTC as a proxy for all crypto as to a large extent, it sets the tone for how the currencies are perceived by traders.
BTC reached its all-time high price of US$68,790 in early November, 2021. It promptly declined to US$34,350 by mid-January, 2022, half its peak price. Ultimately, BTC found a bottom at $15,600 in mid-November, 2022, roughly 12 months after its all-time high.
Such a precipitous decline had many believing BTC (and all cryptos) were foolishness and will disappear, taking a lot of peoples money with them. 12 months after bottoming Bitcoin had recovered its price to US$38,415 (mid-November 2023) more than doubling in that time. In the 3.5 months to the end of February, 2024, BTC has skyrocketed to US$63,000.
It may be difficult to point to any one factor which is driving the price of BTC in particular however there a few to consider.
- BTC ‘halving’ – an event which rewards BTC miners with less (half) the BTC created (read further here). In and of itself this doesn’t explain the dramatic rise, but rather the apparent scarcity of future available BTC as it halves. It will eventually finish being mined (created).
- BTC becoming more available to mainstream investors via recently issued exchange- traded funds (ETFs) in US financial markets.
- BTC being seen as a substitution for gold.
This last point is contentious. Evidence suggests that investors have started to move from gold to BTC after the launch of spot Bitcoin exchange-traded funds (ETFs), according to the CEO of ARK Invest. “Relative to gold, Bitcoin has been rising. There’s now a substitution (for gold) into Bitcoin and we think that is going to continue now that there is a less friction-filled way to access Bitcoin,” said ARK Invest’s Cathie Woods.
There might be something to it. Like gold there is evidence of BTC proving to be a “risk off asset” when the banking sector shows signs of weakness. In March, 2023 the United States experienced a “regional bank crisis,” leading Bitcoin’s price to shoot up 40%.The Regional Bank index is under pressure now, again, and BTC has shot up.
Whilst tempting, traders need to be wary about how to approach cryptos. According to a well-known index measuring market sentiment, BTC traders have entered a period of “extreme greed”.
The Fear & Greed Index, published by data source alternative.me, measures market enthusiasm for BTC and other selected digital assets. The last time the index reached a score of 79 out of 100 was when BTC hit all-time highs in, you guessed it, November 2021. As of writing, the index has reached 83 out of 100.
If it remains of interest to hold BTC, Australian investors can participate via the historical means of trading directly on a crypto platform. An alternative is to buy an Australian listed ETF providing underlying exposure to BTC (code: EBTC). There is also an ETF for Ethereum (code: EETH).
Whatever one thinks of cryptos it appears these will continue to capture the attention of traders and speculators. As with any investment, be very aware of what level of risk you are willing to take.
The foregoing is not to be understood as a recommendation or inducement to invest, trade or speculate on or in digital assets. It is provided as an information piece and should not be relied upon as personal financial or investment advice.
Disclosure: The writer holds positions in Australian listed cryptocurrency ETFs (EBTC, EETH) and US listed cryptocurrency miners and ETFs.