The year 2023 was a goodie for cryptocurrencies, with Bitcoin delivering investors a return of over 160% year-on-year.
With the recent approval of Bitcoin spot ETFs, the Bitcoin halving due in April, and several other macro factors increasing the likelihood of a volatile stock market, crypto is entering 2024 with bullish momentum.
The first Bitcoin ETF
The approval of the first U.S. spot bitcoin exchange-traded fund happened earlier this year and it’s a big deal. Its approval by the Securities and Exchange Commission (SEC) could mean an uplift in the reputation, and an important validation of the value, of cryptocurrencies.
A Bitcoin ETF allows institutional investors to gain exposure to Bitcoin without the complex process of buying, storing, and managing the digital currency directly. This holds massive potential - it could lower the entry barriers for average investors, increase liquidity and stability in the crypto market, and signify a monumental shift in digital assets acceptance by mainstream financial institutions.
The Bitcoin halving
Bitcoin halving is a scheduled event in the Bitcoin network that occurs approximately every four years. During a Bitcoin halving, the reward that miners receive for validating and adding new blocks to the blockchain is reduced by half. This event is encoded in the Bitcoin protocol as a way to control the supply of new bitcoins entering circulation and maintain the overall scarcity of the cryptocurrency. The next event is scheduled for April 2024 and investors will be keeping a close eye on the markets when it arrives.
Some market participants believe that the reduction in the supply of new bitcoins, combined with a steady or increasing demand, may contribute to upward pressure on the price of Bitcoin. Each of the three previous halving cycles (in 2012, 2016, and 2020), has led to a rise in the crypto's price.
Hedging against stock market volatility
With 2024 being an election year, the possibility that the Federal Reserve will cut interest rates, and with some predicting that the US economy will experience a recession; a lot of people may look to crypto as a hedge against economic uncertainties.
Cryptocurrencies operate on decentralized blockchain technology, which is not directly tied to any government or central authority. This can make them less susceptible to the geopolitical and economic factors that often influence traditional financial markets.
Historically, the price movements of cryptocurrencies have shown a relatively low correlation with traditional financial markets like stocks and bonds. This lack of correlation means that cryptocurrencies may not move in sync with other asset classes, potentially providing diversification benefits for investors.
Some investors view certain cryptocurrencies, especially Bitcoin, as "digital gold" or a store of value. The idea is that, like gold, cryptocurrencies can retain value during times of economic uncertainty or market turbulence.