Many investors expected soaring gains from the cryptocurrency market in 2024, but the leading crypto names took a different path. Coin and token prices stagnated from March to November, trending down for most of that period.
The presidential election results lit a new fire under that stalled market. Bitcoin (BTC 1.57%) soared to record highs on November 6, rising above the $75,000 mark for the first time.
Is the largest and oldest cryptocurrency poised for bigger gains after that growth spurt, or should crypto investors stay away from these soaring digital coins?
Let's take a look.
CRYPTO: BTC
Key Data Points
Expected catalysts for Bitcoin gains
The election results are fresh on every investor's mind. President-elect Donald Trump made a campaign promise to support Bitcoin and set up a national stockpile of the cryptocurrency. That's a distinctly different tone than the reluctant reviews of digital assets under the Biden administration. On several occasions, Trump also said that Bitcoin production should be centralized on American soil. Active government policies in support of that idea would be helpful for crypto miners with substantial domestic operations, including industry leaders MARA Holdings (MARA 1.45%) and Riot Platforms (RIOT 0.54%).
The Federal Reserve has stopped raising interest rates to stave off inflation threats, embarking on a stepwise reduction of key rates to stimulate economic growth instead. For two intertwined reasons, this shift should make large-scale investors more interested in taking market risks with borrowed money. High-risk, high-reward investments like Bitcoin can provide more generous returns than buying low-rate debt papers. At the same time, it's easier and less costly to access debt-based capital when interest rates are low.
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And then there are the specific quirks of the crypto market, and of Bitcoin itself.
The recent introduction of exchange-traded funds (ETFs) based on spot Bitcoin prices has made the crypto asset available to whole new types of investors. From retirement accounts to massive institutional investment firms, these new buyers are injecting more real-world capital into the cryptocurrency market. After an early growth spurt, leading Bitcoin ETFs like the iShares Bitcoin Trust ETF (IBIT +1.59%) calmed down over the summer, but the trading activity skyrocketed again after the election.
Don't forget about the halving of Bitcoin mining rewards. This technical change was included in the original Bitcoin whitepaper 16 years ago and is executed approximately once every four years. With leaner mining rewards and constant costs of running massive number-crunching systems, Bitcoin's economic model demands higher coin prices over time. The first three halvings led to skyrocketing gains over the next two years. The fourth one took place in April and the entire Bitcoin industry is still waiting for the expected price surge. History suggests that it should happen over the next few months, and the election-based surge might be the kick-start that finally gets it going.
So there's plenty of potential upside for Bitcoin investors, even at record-setting coin prices. So-called Bitcoin maximalists such as MicroStrategy (MSTR 0.17%) chairman Michael Saylor are investing most of their cash in Bitcoin to take advantage of its long-term value gains, and then raising more cash to double down on the investment. From this point of view, Bitcoin is a great buy below $80,000 per coin.
It's still a risky investment
Remember what I said about high risk and high reward? There's a downside to that equation.
Bitcoin's price chart has calmed down in recent years but it's still a volatile asset. The price dips can be as terrifying as the jumps are thrilling. Debt-driven Bitcoin buys can result in painful margin calls if cryptos have a bad day or a weak week. Companies like MicroStrategy are literally betting the farm on Bitcoin and it could end in disaster. As a retail investor without bank-like cash reserves, I would never buy Bitcoin with borrowed money.
That's not the only Bitcoin risk, and master investors like Warren Buffett have sworn to stay away from digital currencies. They may be right. Maybe Bitcoin isn't the only way forward to a more efficient world economy after all. In that case, Bitcoins are hardly worth the paper they're not printed on.
Your mileage may vary, but...
I'm not smarter than Buffett and he will always be a better investor. Still, he would be the first to admit that he makes mistakes. And in this case, I think he's missing out on a game-changing opportunity by staying on Bitcoin's sidelines. The growth catalysts are real and they seem to outweigh the risks in the long haul.
You shouldn't follow Michael Saylor's example, but some exposure to Bitcoin could be a healthy addition to any long-term investment portfolio. Starting a position before Bitcoin reaches $80,000 could set you up for an auspicious thrill ride. If your brokerage doesn't have access to cryptocurrencies and you don't want to open a new account just for this, you could reach for the iShares Bitcoin ETF and its peers.
