Another record is broken by Bitcoin: is now a good time to invest?

Bitcoin (BTC-USD) has surged to new heights in 2024 after recovering from a tough crypto winter that began two years ago. The largest cryptocurrency in the world has now broken through the $90,000 threshold, seeing a gain of over 30% since the presidential election.

Bitcoin first crossed the $70,000 mark in March 2024, fueled by the U.S. SEC’s approval of new bitcoin spot exchange-traded funds (ETFs). These ETFs made it easier for investors to buy bitcoin through brokerage or retirement accounts.

In July, the first Ethereum ETFs began trading after receiving approval from the SEC earlier in the year.

As bitcoin enters the mainstream and sets new records, is it time to get involved? Caution is advised.

A 2023 survey by Pew Research Center revealed that 75% of Americans familiar with cryptocurrency expressed concerns about its safety and reliability. Despite this, bitcoin's price began climbing again later in 2023 after a federal appeals court ruled that the SEC had wrongfully rejected Grayscale Investments' application to convert its Bitcoin Trust into a spot bitcoin ETF. In October 2023, the SEC announced it would not appeal the decision. In January, the SEC approved nearly a dozen spot bitcoin ETFs, allowing investors to gain exposure to bitcoin directly without needing a crypto exchange or dealing with storage and security concerns.

Ric Edelman, founder of the Digital Assets Council of Financial Professionals, explained, “There are ETFs that invest in stocks of companies in the crypto industry, such as exchanges and miners, and others that trade bitcoin futures, but until now, there haven’t been ETFs that directly own bitcoin itself.”

Edelman emphasized that these new spot bitcoin ETFs are viewed as the safest option for custody, as they are regulated by the SEC, which ensures the safeguarding of the bitcoin held by these funds.

Despite all the excitement surrounding bitcoin, investors should be aware of the risks. Bitcoin, like other cryptocurrencies, is considered a speculative investment, meaning it doesn’t produce income like dividends or interest. Investors are essentially betting on price appreciation.

Michael Finke, a wealth management professor, noted, "Normally, you think of financial assets as providing capital to a company, which in turn creates profits. Bitcoin doesn’t create anything, so its valuation is purely speculative."

This may not seem concerning, especially after bitcoin’s impressive rise over the past five years, but it's essential to remember that unlike companies whose stocks generate dividends and profits, bitcoin’s price is driven purely by speculation.

While bitcoin’s price has grown significantly, remember that the stock market historically generates returns through reinvested dividends and compounding, a key factor in long-term growth. Research by Hartford Funds found that 69% of the S&P 500’s total return between 1960 and 2022 came from dividends. Without dividends, a $10,000 investment in the S&P 500 in 1960 would have only grown to $641,000, compared to over $4 million with reinvested dividends.

Bitcoin’s value is highly volatile, and this can lead to both great opportunities and significant losses. While its price surged recently, the same volatility was evident in 2022 when bitcoin dropped by over 60% while the S&P 500 fell by only 19%.

Edelman advises that, given bitcoin's speculative nature and volatility, it may be appropriate for a long-term portfolio but recommends limiting exposure to 1%-5%. He suggests that even with the risks, a small allocation could potentially enhance overall portfolio returns.

Diversification is often cited as a reason to invest in bitcoin and other cryptocurrencies. Spreading risk across different asset classes can help mitigate significant losses. However, some recent research indicates that bitcoin’s correlation with the stock market is growing, especially during crises, undermining its potential as a hedge.

A 2023 IMF paper observed that bitcoin and stock prices, which were once largely uncorrelated, have become increasingly linked since mid-2020. Bitcoin failed to serve as a hedge during the COVID pandemic and the Russian invasion of Ukraine, as well as the recent crypto winter.

Although some retirement plans, such as those offered by Fidelity, now provide limited options for investing in cryptocurrency, Finke doesn’t expect this trend to expand widely. Retirement plans have a fiduciary duty to protect participants’ interests, making them cautious about adding high-risk options like cryptocurrency.

In fact, the U.S. Department of Labor has advised caution for 401(k) plan administrators, noting that evaluating crypto assets can be difficult, even for seasoned investors.

Ultimately, investing in bitcoin is a personal decision, whether via ETFs or direct ownership. If you do decide to invest, ensure that you already have a diversified portfolio and be cautious about allocating money you cannot afford to lose.

Before buying bitcoin, ask yourself what’s driving your decision: Do you believe in its long-term potential, or are you succumbing to the fear of missing out (FOMO)?

Finke warns that investors often get burned by jumping into assets simply because they’ve recently gained in value. “This recent surge in bitcoin is a perfect example of a shiny object that has attracted attention, but it may not deliver good returns in the future,” he cautioned.

 

 

 

 

 

 

 

 

Paraphrasing text from "Yahoo Finance" all rights reserved by the original author.