Bitcoin Reaches Another All-Time High. What Next?

Bitcoin continued its rally yesterday, breaking through the $69,000 barrier and setting a new all-time high. The leading cryptocurrency has gained almost 60% since the start of the year, per CoinMarketCap data. Its rise has been fueled by the SEC's approval of a spot Bitcoin ETF and the upcoming Bitcoin halving.

Bitcoin's last high came during the crypto frenzy in November 2021. That was before the industry was shaken by a series of calamities, including the failure of Terraform's Luna, the collapse of FTX, and subsequent revelations about what both companies were doing with investor money.

If you got burned by previous crypto price crashes, or are nervous about buying Bitcoin, you may well be wondering if this rally is different and if Bitcoin might hold its gains. The short answer is that only time will tell.

What next for Bitcoin?

Crypto investors are likely used to the volatility of the crypto market. Unlike the stock market, it isn't unusual to see huge price swings in a matter of days. Indeed, Bitcoin dropped around 10% immediately after hitting its new high before climbing slightly and finishing the day around $67,000.

Crypto enthusiasts such as Galaxy Digital's Mike Novogratz say that this is just the start. But given that Novogratz was so excited about Terraform's Luna, he got a Luna tattoo before the whole enterprise caved in, it's hard to take his optimism seriously.

That said, Novogratz is not alone. A lot of insiders are confident this rally is different. That's partly because the spot Bitcoin ETFs have attracted more institutional money, which tends to be stickier. Plus, there's growing optimism that the Fed will soon start cutting rates and the U.S. might skirt a recession.

Bear in mind that neither the improved economic outlook nor the influx of institutional money say anything about Bitcoin's fundamentals. That's what matters, particularly if you are a long-term investor.

Cryptocurrency is still a risky asset

I hold Bitcoin (along with other cryptocurrencies) and am certainly relieved to see prices recover. Even so, price doesn't reflect value. It can be arbitrary and move based on speculation and market sentiment. To put it another way, the fact that Bitcoin just erased the losses of recent years doesn't automatically make it a safe investment.

If you're considering buying Bitcoin, think about the fundamentals. Some Bitcoin believers think that cryptocurrency could become the digital currency of the internet. Others argue it is like digital gold, a store of value that cannot be controlled by governments. Others think it could take a portion of the international remittance market, as it makes it easy for people to move money internationally.

Bitcoin's critics say it doesn't have any intrinsic value. Despite all the hype, people are not using it as a currency -- in part because of the huge price fluctuations. Some argue that Bitcoin is mostly used for illicit activities, such as money laundering and ransomware. Plus, Bitcoin mining consumes vast amounts of energy, with a carbon footprint the size of a small country.

Four questions every crypto investor needs to consider

Whether you buy into one of the new spot Bitcoin ETFs or open an account with a cryptocurrency exchange, crypto investing is not for everyone. As with any investment, you need to take time to research and learn about what you're buying. Here are a few things to ask.

1. Do you understand the risk?

We've already touched on some of the risks involved in crypto, such as volatility and questions about its long-term potential. Another is that there are limited investor protections. Unlike money in a bank account which is covered by FDIC insurance against bank failure, if your crypto platform fails, you could lose everything.

One way you can mitigate this is to put your crypto into a crypto wallet that you control. Just be aware that if you lose your security information, you might lock yourself out of your wallet forever.

2. How will you cope if you lose your crypto investments?

Losing money is always difficult. But it is more manageable if you only invest money you can afford to lose. Some people lost their life savings when Terra's Luna cryptocurrency collapsed.

If you want to buy crypto, make sure it is only a small part of a wider portfolio. That way, if the crypto market does crash again, it won't derail your retirement plans or leave you unable to pay your rent or mortgage.

3. Are you comfortable with the regulatory environment?

Cryptocurrency is a relatively new and unregulated market. The SEC is pursuing cases against several top crypto exchanges because it believes many cryptocurrencies are trading as unregulated securities. The outcome of these cases -- alongside broader moves to introduce stricter crypto regulation -- could change the way people buy and sell crypto in the U.S.

4. Why are you buying cryptocurrency?

Many people bought cryptocurrency in 2021 because they were scared of missing out, only to get burned when prices crashed. Don't buy Bitcoin because other people are or because you think you might get rich quickly. History has already shown us that crypto prices can rise and drop dramatically.

Consider how your crypto investments fit with your wider investment goals and be clear on your rationale for buying. Clarity on the "why" can often be what stops us from panic selling if prices start to fall.

Bottom line

Bitcoin has erased the losses of the past few years and many insiders are confident the price can rise further. Even so, it's important to understand the risks involved and make your own decisions about cryptocurrency's long-term potential.