Bitcoin has experienced a notable resurgence in 2024, emerging from a tumultuous crypto winter that persisted for two years prior. In March 2024, Bitcoin’s price breached the $70,000 threshold for the first time, primarily fueled by the SEC’s authorization of new bitcoin spot ETFs (exchange-traded funds). These ETFs simplify the investment landscape, allowing individuals to invest in bitcoin through brokerage and retirement accounts without navigating the complexities of crypto exchanges. Additionally, the introduction of ethereum ETFs in July 2024 further signifies the increasing mainstream acceptance of cryptocurrencies. However, potential investors are advised to exercise caution despite the allure of Bitcoin’s current momentum.
In early 2023, skepticism about cryptocurrency’s reliability was prevalent, with a Pew Research Center survey showing that 75% of Americans doubted its safety. However, investor sentiment began to shift later that year after a federal appeals court ruled in favor of Grayscale Investments, leading to the SEC’s approval of nearly a dozen new spot bitcoin ETFs in January 2024. Unlike previous ETF offerings that involved indirect investments through companies or futures contracts, these spot ETFs provide direct ownership of bitcoin. This regulatory change offers a more secure and simple way for investors to gain exposure to Bitcoin, which many view as a safer option due to the SEC’s oversight concerning custody and safeguarding.
Despite Bitcoin’s impressive price gains—over 600% in five years—experts urge caution as cryptocurrencies are fundamentally speculative investments. Unlike conventional assets like stocks which generate income through dividends, Bitcoin does not produce earnings or interest. Consequently, its value relies entirely on market demand and speculation, leading to a high potential for volatility. While past performance may tempt investors, it is essential to remember that such assets do not provide any formal financial return unless their prices appreciate significantly, making them a risky investment choice, especially in the long run.
In terms of volatility, Bitcoin’s price fluctuations can be stark and dramatic. For instance, during the broader stock market downturn of 2022, which saw the S&P 500 decline by about 19%, Bitcoin suffered an even larger loss, plummeting over 60%. Industry experts, like Ric Edelman, acknowledge Bitcoin’s speculative nature but suggest it may still have a place in a long-term investment portfolio if confined to a small portion—around 1% to 5% of one’s overall investments. Given the risks associated with Bitcoin, including its susceptibility to rapid price changes, it is vital for potential investors to approach it with a clearly defined and cautious strategy.
While diversification is a common reason for adding cryptocurrencies to investment portfolios, research indicates that correlations between stock and Bitcoin prices are increasing. A working paper from the International Monetary Fund notes that the relationship between stock and Bitcoin prices became notably correlated around mid-2020, particularly during significant global events, such as the COVID-19 pandemic and geopolitical crises. This increased correlation suggests that Bitcoin may not effectively hedge against market volatility as previously thought, raising questions about its suitability as a diversifying asset within investment portfolios.
While some financial firms have begun to provide opportunities for investing in cryptocurrency through retirement accounts, broad adoption in traditional retirement plans remains uncertain. Experts point to the significant fiduciary responsibilities plan sponsors have in safeguarding participants’ interests, leading to a cautious approach toward introducing crypto assets to retirement plans. The U.S. Department of Labor has previously warned about the complexities and risks associated with evaluating digital assets, further underscoring the need for careful consideration. Ultimately, any decision to invest in Bitcoin or related assets should be personal and thoughtful, rooted in a clear understanding of one’s investment portfolio and risk tolerance while avoiding impulsive actions driven by market trends or fear of missing out.
