New Delhi: The world’s largest cryptocurrency, Bitcoin, has been on a remarkable rally in the past few weeks, reaching new heights and smashing previous records. On Tuesday, March 4, 2024, Bitcoin soared to $69,202, surpassing its previous all-time high of $68,999, which was set in November 2021. This marks a staggering increase of more than 55 percent in a month and more than 44 percent in February alone.
However, the euphoria was short-lived, as Bitcoin experienced a sharp correction on March 5, plunging 12 percent from its peak and dropping below $61,000. This was the biggest one-day fall since November 2022, when Bitcoin crashed from $58,000 to $48,000.
What is driving Bitcoin’s surge?
Several factors have contributed to Bitcoin’s impressive performance, including:
- Growing institutional adoption: Bitcoin has gained more legitimacy and acceptance among institutional investors, who see it as a hedge against inflation and a store of value. Some of the notable examples of institutional adoption include Tesla’s $1.5 billion purchase of Bitcoin in February 2021, MicroStrategy’s $2.2 billion investment in Bitcoin as of March 2021, and Square’s $220 million purchase of Bitcoin in October 2021 and February 2021. Moreover, several prominent financial institutions, such as Morgan Stanley, Goldman Sachs, and BNY Mellon, have announced plans to offer Bitcoin-related services to their clients.
- New US exchange-traded funds (ETFs): In February 2021, the US Securities and Exchange Commission (SEC) approved the first Bitcoin ETF in the country, the Purpose Bitcoin ETF, which trades on the Toronto Stock Exchange. This was followed by the approval of another Bitcoin ETF, the Evolve Bitcoin ETF, which also trades on the Toronto Stock Exchange. These ETFs allow investors to gain exposure to Bitcoin without having to buy or store the cryptocurrency directly, thus lowering the barriers to entry and increasing the demand. According to ASEG data, investment in 10 spot US crypto funds has reached $2.17 billion as of March 1, 2024.
- Halving event: Bitcoin operates on a fixed supply of 21 million coins, which are released gradually through a process called mining. However, every four years, the rate of new Bitcoin creation is cut in half, in an event known as the halving. The last halving occurred in May 2020, reducing the reward for mining a block from 12.5 to 6.25 Bitcoins. This creates a scarcity effect, as the supply of new Bitcoins decreases while the demand increases, leading to a rise in the price. The next halving is expected to occur in April 2024, which could further boost the value of Bitcoin.
What are the challenges and risks facing Bitcoin?
Despite its impressive performance, Bitcoin is not without its challenges and risks, such as:
- Volatility: Bitcoin is known for its high volatility, as it can experience significant price fluctuations in a short period. This makes it difficult to predict its future movements and exposes investors to potential losses. For example, on March 5, 2024, Bitcoin lost 12 percent of its value in a single day, wiping out billions of dollars from the market. Such volatility can be influenced by various factors, such as market sentiment, regulatory developments, technical issues, cyberattacks, and competition from other cryptocurrencies.
- Regulation: Bitcoin operates in a largely unregulated and decentralized environment, which poses challenges to its integration into the mainstream financial system. Different countries have different approaches to regulating Bitcoin, ranging from supportive to hostile. For example, in February 2021, India proposed a bill to ban all private cryptocurrencies, including Bitcoin, and create a digital rupee instead. On the other hand, in March 2021, Germany passed a law that allows special funds to invest up to 20 percent of their assets in Bitcoin and other cryptocurrencies. Such regulatory uncertainty can create confusion and instability for Bitcoin and its users.
- Security: Bitcoin relies on a network of computers, called nodes, to verify and record transactions on a public ledger, called the blockchain. However, this network is vulnerable to cyberattacks, hacking, and fraud, which can compromise the security and integrity of Bitcoin. For example, in February 2021, a hacker stole $37 million worth of Bitcoin from a Turkish cryptocurrency exchange, causing the exchange to shut down and leaving thousands of users unable to access their funds. Moreover, Bitcoin users are responsible for safeguarding their own private keys, which are needed to access their wallets and transactions. If these keys are lost, stolen, or forgotten, the users may lose their Bitcoins permanently.
What is the outlook for Bitcoin?
Bitcoin has shown remarkable resilience and innovation in the past decade, overcoming various challenges and reaching new heights. It has also attracted more attention and adoption from various sectors and segments of society, such as investors, corporations, governments, and celebrities. However, it still faces many uncertainties and risks, which could affect its future performance and potential. Therefore, Bitcoin remains a highly speculative and volatile asset, which requires careful research and analysis before investing.
