A month after bitcoin spot exchange-traded funds (ETFs) were launched in the United States on 11 January, the price of the world’s largest cryptocurrency surpassed $50,000, its highest since December 2021. The price of the digital asset climbed to $50,328 on Monday. before settling for just over $50,000 by the end of the day.
A higher flow of funds into the cryptocurrency since the US Securities and Exchange Commission (SEC) approved the launch of bitcoin spot ETFs in January is seen as the main trigger for the latest rally, which began about a week ago.
Bitcoin is up 150% in 2023 in part on anticipation of bitcoin spot ETFs by early 2024. Its price has risen another 16% so far this year (as of February 13), helping many who stayed invested to recover some of their losses from the crash of 2022. .
In addition to higher inflows, which were led by institutional investors, the anticipation of signals from the US Federal Reserve about when it could start cutting interest rates, and the imminent halving of bitcoin rewards in April-May are triggers for the latest rally. These developments are expected to push the price of bitcoin higher in 2024. The next meeting of the Federal Open Market Committee is scheduled for March 19-20.
The SEC approved 11 point bitcoin ETFs on 10 January. Nine bitcoin spot ETFs were launched the next day, and Grayscale Bitcoin Trust was also turned into an ETF the same day. However, the price of bitcoin fell 20% from $49,000 on the day of the ETF’s spot launch to below $40,000 by January 22. The cryptocurrency then began a steady increase on January 26.
The price of bitcoin reached an all-time high of $68,789 in November 2021 before crashing to $15,760 in December 2022 amid the collapse of FTX, then the world’s second largest cryptocurrency exchange, and allegations of fraud against its CEO Sam Bankman-Fried. Fears of worsening macroeconomic conditions and rising interest rates also contributed to the collapse.
Now back around $50,000, bitcoin has come a long way since those dark days. Mint explains why bitcoin is surging again.
Higher inflows
The recent surge in bitcoin prices was driven by about $1.1 billion flowing into ETFs over the past week — the highest weekly inflow since the launch of bitcoin spot ETFs. This influx has seen ETFs collectively accumulate 200,000 bitcoins, pushing up the price of the digital asset, which has a limited supply and a cap on the number of new tokens added each day. More funds are expected to flow into bitcoin spot ETFs in the coming weeks and months as it becomes a mainstream asset class in investors’ portfolios.
Upcoming halving of rewards
While demand increases, supply is more limited after about two months. The creators of bitcoin designed the cryptocurrency to have an upper limit of 21 million coins, which they felt would create scarcity and thus drive up its value. So far, just over 19.6 million have been ‘mined’, and 900 bitcoins are currently added every day. A new block is added to the chain once approximately every 10 minutes, and crypto miners are rewarded with 6.25 bitcoins currently for each block they create.
Bitcoin’s inventors designed this reward to halve every time 210,000 blocks are added to the chain, which usually happens every four years. This next halving of rewards is expected to happen in April-May, so miners will only get 3.125 bitcoin per block until the next halving.
Since the halving of bitcoin rewards slows the increase in the supply of the cryptocurrency, its price usually starts to rise well in advance, and soars after the halving. For example, in the 12 months after the most recent halving in 2020, bitcoin gained about 560%. And in the 12 months after the first halving in 2012, it jumped more than 8,000%.
Waiting for tax cuts
Rising interest rates affect cryptocurrencies, as they do all risky assets. When the Fed kept rates steady at its December meeting, cryptos gained. If it now signals that tariffs may start as early as June 2024, as some analysts expect, investors are likely to increase their allocation to risky assets like crypto. That could trigger another rally in the price of bitcoin and other crypto assets.