After a harsh crypto winter that started two years ago, Bitcoin broke its previous record in 2024. Bitcoin price crossed the $70,000 level for the first time in March 2024. The rally was driven by the SEC's approval of a new Bitcoin spot exchange-traded fund (ETF) that makes it easy to invest in Bitcoin with just a brokerage account or retirement account. account.
The first Ethereum ETF also began trading in July after receiving permission from the SEC two months ago.
As Bitcoin becomes more mainstream, is it time to get involved? Proceed with caution.
A Pew Research Center survey in early 2023 found that 75% of Americans who had heard of cryptocurrencies said they had no confidence in their safety or reliability.
However, later that year, the world's largest Cryptocurrency prices have begun to rise again. In October 2023, the SEC announced that it would not appeal the court's decision.
And in January, it gave the OK to nearly a dozen new exchange-traded funds called Spot Bitcoin ETFs. Spot ETFs own an underlying asset, such as gold, silver, or now Bitcoin, and closely track its price, net of transaction costs and fees.
“There has never been an ETF like this before,” said Rick Edelman, founder of the Digital Asset Council. “There are ETFs that invest in the stocks of companies that operate in the cryptocurrency industry, such as exchanges and miners, and ETFs that trade Bitcoin futures, such as purchasing stock options instead of stocks, but until now, none have existed. I didn't. Any ETF that invests directly in Bitcoin and owns Bitcoin will do.”
The SEC's decision will allow investors to gain direct access to Bitcoin without having to go through crypto exchanges or suffer from storage or security issues. Instead, investors can easily gain exposure to Bitcoin by holding stocks in a brokerage account such as an Individual Retirement Account (IRA).
“The new Spot Bitcoin ETF is widely considered to be the most secure from a custody standpoint because it is regulated by the SEC and takes care of protecting your Bitcoin for you,” Edelman said. Ta.
With all the hype surrounding Bitcoin, it's natural to want to buy it. But before you try to profit from volatile prices, there are many things you should know first.
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Bitcoin and other cryptocurrencies are speculative investments, assets that people put money into in the hopes that the price will rise rapidly. Speculative assets are sometimes referred to as unproductive assets because they do not generate income such as interest, dividends, or profits. Investors who purchase speculative assets typically seek to profit from short-term price fluctuations.
“Typically, the way we think about financial assets is that we're providing capital to a company,” says Wealth, the Frank M. Engle Distinguished Chair in Economic Security at the American College of Financial Services. says management professor Michael Finke. . “A company uses its capital to make something, people buy it, and that makes a profit. You can value a company based on its expected future profitability. In the case of Bitcoin, nothing valuation is completely speculative.”
That may not seem like a big deal to anyone who has watched the price of Bitcoin go up and up over time. Who needs dividends or interest, considering the price of Bitcoin has soared over 600% in the past five years?
You might think that the price of Bitcoin will continue to rise forever. After all, the stock market has a proven track record of rising over long periods of time. However, keep in mind that unlike companies in which you can buy stock, Bitcoin does not create products or services that people actually use. Its use as a payment method is extremely limited.
Also, much of the wealth historically created by the stock market has come from reinvestment, not from rising stock prices. When your dividends are reinvested (usually done automatically in most 401(k)s and many automated brokerage accounts), you end up buying more stocks, allowing your money to compound and grow over time. You can reap even more benefits over time.
About 69% of the S&P 500's total return from 1960 to 2022 came from dividends, not price appreciation, according to research by The Hartford Fund. To put it another way, if you invested $10,000 in the S&P 500 in 1960, it would have been worth more than $4 million by the end of 2022. But without dividend reinvestment and compounding, that same investment would only have been worth about $641,000.
Bitcoin and other cryptocurrencies cannot earn dividends, so returns must come solely from price increases.
“People tend to be attracted to things that have recently gone up in price,” Finke says. “And that's attractive to people who are investing, but especially sentiment-driven investors. They see prices going up and they want to be part of it. I think about it. There's always the fear of missing out.”
Bitcoin price remains volatile
Bitcoin is much more volatile than the overall stock market. When prices are collapsing, as we've seen in recent months, it can be an exciting situation.
However, when the economy worsens, the price of Bitcoin often falls significantly compared to stocks. Take 2022, for example, the S&P 500 index was down about 19%, and it was a terrible year for the stock market in general. In the same year, Bitcoin lost more than 60% of its value.
Edelman said that while Bitcoin is highly speculative and has a history of volatility, he believes that if investors limit Bitcoin to between 1% and 5%, its potential makes it suitable for long-term portfolios. Emphasize that there is.
“The risks are high, and if it fails, there will be no significant damage if the allocation is low, in the single digits,” he said. “And with the potential for huge returns, even a small allocation can have a big impact on your overall investment return.”
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Still, one common reason to invest in Bitcoin and other cryptocurrencies is to diversify your portfolio. Spreading your risk across multiple asset classes can reduce your overall risk of incurring large losses.
The relationship between stock prices and virtual currency prices has been debated for a long time. However, recent research suggests that the correlation between stock prices and Bitcoin prices is increasing, meaning that they are increasingly moving in the same direction.
A 2023 research report by the International Monetary Fund states that Bitcoin and stock prices “had little correlation until 2020, but the correlation has increased since the second half of 2020.” One possible explanation is that institutional investors are more likely to have exposure to both Bitcoin and stocks.
Researchers at Georgetown University noted that the correlation between Bitcoin and the S&P 500 increases, especially during times of crisis. The paper states that this correlation “increased significantly during the coronavirus pandemic, Russia's invasion of Ukraine, and the crypto winter, suggesting that Bitcoin did not act as a hedging asset during these events.” It shows,” he said.
Don't expect your 401(k) administrator to start offering Bitcoin right away. Both Fidelity and FORUSALL, a small management company, offer employers the option to allow plan participants to invest small amounts of their retirement funds in cryptocurrencies.
However, Finke doesn't foresee any plans to make crypto widely available to employees, even with the new Bitcoin ETF. Plan sponsors have a fiduciary responsibility and are obligated to act in the best interests of their participants. One of those responsibilities is to minimize the risk of large losses.
“Plan sponsors are very cautious and their consultants are very cautious about adding investment options to the plan's core menu,” Finke said.
In fact, the U.S. Department of Labor has warned 401(k) plan administrators to be careful before contributing crypto assets to retirement plans, stating in a March 2022 memo that “Professional Investments Even at home, valuing crypto assets can be very difficult.” Organize your assets and separate fact from hype. ”
learn more: How much can you contribute to your 401(k) in 2024?
At the end of the day, investing in Bitcoin is a personal decision, whether you buy an ETF or an actual digital coin. If you want to invest, you should already have a diversified portfolio of assets, such as an index fund. Typically, you don't want to invest your money in speculative assets that you can't afford to lose.
Before buying Bitcoin, think about what motivates you. Do you believe Bitcoin has long-term investment value, or is it a case of FOMO, or fear of missing out?
“Investors who are drawn to shiny things tend to be consistently punished because they have increased significantly in value recently,” Finke said. “This recent rally in Bitcoin seems like a great example of a shiny thing that is getting a lot of attention from investors, but may not perform as well in the future.”
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