The cryptocurrency market has been on a tear since mid-October, growing from a market cap of just over $1 trillion to over $2.2 trillion at the end of February.
While the overall crypto market remains below its all-time high close to $3 trillion set in November 2021, one cryptocurrency is rapidly approaching its previous all-time high. The stalwart cryptocurrency (if that's a thing) Bitcoin (BTC -2.11%) is within reach of its peak price around $69,000 set on Nov. 10, 2021.
Here's why it might be a smart move to buy before it sets a new all-time high.
Image source: Getty Images.
Demand is growing, thanks to ETFs
The price of a cryptocurrency like Bitcoin is largely determined by supply and demand. When demand is growing faster than supply, the price increases.
The SEC approved a handful of new Bitcoin spot ETFs in January. Unlike previous Bitcoin funds, the new ETFs can hold Bitcoin directly instead of investing in derivatives. That's a big change in the market.
The ETF approvals opened the door for more investors to buy into Bitcoin. In particular, it's now much easier for institutional investors to gain exposure to Bitcoin as well as investors saving for retirement in an IRA or 401(k). That is to say, there's much more potential demand for Bitcoin thanks to these new ETFs.
However, the first few weeks following the ETF approvals didn't see a huge increase in demand for Bitcoin from the ETFs. That's because one of the ETFs, the Grayscale Bitcoin Trust, saw significant outflows from shareholders due to its relatively high expense ratio. While Grayscale is still the largest Bitcoin fund, the selling pressure has eased in recent weeks. As a result, net inflows into all Bitcoin ETFs has started growing much faster. So far, over $6.7 billion has been added to Bitcoin ETFs since their approval on Jan. 11.
Supply will start increasing more slowly soon
On the other side of the equation, Bitcoin supply growth will see a big slowdown in the near future.
The next Bitcoin "halving" -- which reduces the block reward to 3.125 Bitcoin from 6.25 Bitcoin -- will take place in April. This means miners will receive fewer Bitcoin for the same amount of work, and it also means the rate of growth for the supply of Bitcoin will slow. Again, if supply grows slower than demand, the price will increase.
The first three halvings in Bitcoin's history have corresponded with bull runs for Bitcoin. Many expect the next halving to exhibit a similar impact on the market.
The Fed could push more investors toward crypto
If the Federal Reserve starts to lower interest rates, it could reduce the appeal of lower-risk investments like Treasury bonds. That money will move toward riskier assets such as stocks and crypto.
While the Fed hasn't started cutting interest rates, we've already seen this dynamic start to play out. Stocks are up significantly since the Fed suggested it could start cutting rates in 2024, as is the cryptocurrency market. While the Fed has suggested rates could remain higher for longer, the market is still pricing in three or four rate cuts this year. If rates fall faster than that, it could push more demand for Bitcoin. Long term, investors should expect rates to come down even more, pushing more investors into riskier assets.
These three catalysts could push Bitcoin well above its all-time high. While we're still a bit off from setting a new record, now's a good time to invest.
