The cryptocurrency market rebounded sharply over the past year amid signs of economic resilience. Inflation has cooled, recession fears have diminished, and the Federal Reserve anticipates a few interest rate cuts this year. Low-rate environments have historically been a good thing for cryptocurrencies, so investors have moved back into the market.
Another reason for the upward momentum is excitement surrounding spot exchange-traded funds (ETFs) for Bitcoin (BTC -1.14%) and Ethereum. Those vehicles track (or would track) the price of the underlying cryptocurrency. Spot Bitcoin ETFs were approved in January and, while many analysts think spot Ethereum ETFs will initially be rejected, they anticipate approval eventually.
Finally, investors are amped up about the halving of Bitcoin mining rewards slated to occur this month. It will be the fourth halving event since Bitcoin was created in 2009, and the last three halving events led to significant price appreciation. Investors are undoubtedly hoping for the same outcome this time around.
Against that backdrop, Bitcoin soared 136% over the past year, but some Wall Street analysts see the cryptocurrency moving much higher during this market cycle. For instance, Tom Lee, managing partner and head of research at Fundstrat Global Advisors, believes Bitcoin could reach $150,000 before the end of 2024 and $500,000 within five years. Bitcoin is currently worth $70,000, so the implied upside is 114% this year and 614% by 2029.
Here's what investors should know.
Tom Lee has a winning track record
Lee rationalized his bullish call on Bitcoin during a recent CNBC interview. "You've got demand improving with the [spot Bitcoin] ETF, you have the supply shrinking with the halving, and if monetary policy eases, which we expect, you know that's supportive of risk assets," he said in February.
Lee is no stranger to bold predictions. For instance, he also told CNBC that the Russell 2000 could soar 45% this year. The Russell 2000 is a benchmark for small-cap stocks, and Lee sees the index as undervalued compared to the large-cap S&P 500. Of course, investors should always consider predictions with skepticism, but Lee does have a reasonably good track record.
He predicted the S&P 500 would rally 24% to reach 4,800 in 2023 as the Federal Reserve eased up on interest rate hikes. Lo and behold, the index ended the year at 4,770. Better yet, Lee's stock-picking product (Granny Shots) has more than doubled the performance of the S&P 500 since its inception in January 2019. That is impressive because just 21% of large-cap funds beat the S&P 500 over the last five years.
I mention those accomplishments not to imply Lee is correct about Bitcoin, but rather to point out that his forecast is worth consideration. So, let's talk about the catalysts he believes could send the cryptocurrency to $500,000 in the next five years: Spot Bitcoin ETFs and the halving of mining rewards.
The first catalyst: The approval of spot Bitcoin ETFs
Like any asset, Bitcoin prices are determined by supply and demand. However, Bitcoin is a somewhat specialized case because its supply is limited to 21 million coins. That supply cap makes the cryptocurrency valuable in the same way that scarcity makes precious metals valuable. But scarcity is irrelevant without demand.
With that in mind, various signals currently indicate that Bitcoin demand is rising. Long-term holders were net buyers in the fourth quarter. Monthly active addresses, new addresses, and transaction count have been trending upward. And the number of accounts with at least 0.1 BTC hit a new all-time high in December 2023, according to Fidelity.
Going forward, spot Bitcoin ETFs could accelerate demand because they offer direct exposure to the cryptocurrency without the friction of specialized exchanges and blockchain wallets. In addition, with many of the largest asset managers participating as issuers -- including No. 1 BlackRock and No. 3 Fidelity -- some analysts believe institutional investors will take a greater interest in Bitcoin.
The first spot Bitcoin ETFs were approved by the U.S. Securities and Exchange Commission (SEC) in January 2024, and the launch has been an unmitigated success. Most notably, BlackRock's iShares Bitcoin ETF became the fastest ever to reach $10 billion in assets, according to The Wall Street Journal. That trend could certainly continue in the future, especially after institutional investors have had time to study the market.
The second catalyst: The halving of Bitcoin mining rewards
The April 2024 halving event is the next catalyst on the horizon. Halving events enforce the 21 million coin limit through programmed reductions in mining rewards. Miners are awarded Bitcoin when they successfully validate blocks of transactions, but the payout is slashed by 50% each time 210,000 blocks are added to the blockchain. That happens about once every four years.
Halving events attentuate selling pressure, simply because miners have less Bitcoin to sell. As a result, Bitcoin has become much more valuable following all three past halving events, which took place in 2012, 2016, and 2020. Its price rose 5,300% between the first and second halving, and 1,200% between the second and third halving. Bitcoin has returned 715% since the third halving event.
Investors should never anchor to price targets
Lee's forecast has merit, and Bitcoin could certainly be worth more (perhaps much more) in the future. However, investors should never fixate on specific price targets. Forecasts are inherently unreliable, even when they're based on decades of data. But Bitcoin has only existed for about 15 years, so forecasts concerning the cryptocurrency are particularly questionable.
Furthermore, investors should remember that Bitcoin has historically been a very volatile asset. For instance, its price plummeted 76% between November 2021 and November 2022. Similar volatility should be expected in the future.
Here's the bottom line: There's no guarantee Bitcoin will come anywhere close to $500,000 in the next five years, but it has created substantial wealth in the past, and it could create more wealth in the future. Patient investors who are comfortable with extreme risk and volatility should buy a small position in Bitcoin today.
