A New Crypto Milestone: Bitcoin Soars to 2-Year High

Bitcoin (BTCUSD) surged to a 2-year high on Tuesday, February 27, driven by growing interest from institutional investors and the widely anticipated "Bitcoin Halving" event in mid-April. This cryptocurrency has been on a good run, gaining over 10% during the two first trading sessions of the week, bolstered on Monday due to a 3000 bitcoin purchase by MicroStrategy (MSTR). At the time of writing on Wednesday, BTC was trading at around $58800.

Renewed interest in the cryptocurrency market supported rival Ethereum (ETHUSD), which also reached a high of $3290 on Tuesday, its highest since April 2022. In addition, the same session found crypto-related stocks rising, with MicroStrategy up over 7% on an analyst upgrade, while Coinbase (COIN) and CleanSpark added around 1%.

Although some analysts expect Bitcoin to hit a new record high of $88000 before settling at around $77000 by the end of the year, experts warn of a temporary rise only, citing macroeconomic risks and pointing to a "bubble".

What Has Been Driving Bitcoin Prices Higher

The combination of the Bitcoin ETF approval and the upcoming halving event are believed to be the main drivers of Bitcoin's appreciation this year. On the one hand, the approval offered institutional validation, marking a potential shift away from its reputation as a speculative asset. On the other hand, historical halving data show that Bitcoin's price tends to increase both before and after the event. Let's look at both potential price drivers separately:

Spot Bitcoin ETFs started trading on January 11, 2024, after receiving approval from the US Security and Exchange Commission (SEC). In fact, Bitcoin ETFs saw record volumes on the first day of trading, exceeding $4 billion in volumes. Industry insiders and observers reacted positively to the approvals, expecting widespread adoption and acceptance of the digital currency as a legitimate asset class. Others pointed to the ETF approval as a potential catalyst for higher prices in the long term, supported by regulatory clarity around the ETFs.

As far as the Bitcoin halving goes, it happens roughly every four years and is designed to control the supply of new Bitcoins. It actually refers to the halving of block rewards for miners. The media coverage has supported sentiment, with the next halving reducing the mining reward to just 3.125 BTC per block around April 2024 and past halving events pointing to similar rallies. Although there is no guarantee of a repetition this time, increased volatility can be expected.

Aside from the two drivers, stabilising interest rates is believed to be another factor influencing the price of Bitcoin. In fact, interest rate cuts by the Federal Reserve (Fed) in 2024 could make Bitcoin a more attractive investment option due to its perceived scarcity and hedge against the traditional financial system – assuming inflation remains in check. However, some believe the approval of the ETF will transmit risks between traditional and cryptocurrency markets more easily.

Although historical data can be used to predict future price movements, Bitcoin prices can be influenced by external factors, and risks remain.

Are There Potential Risks to BTC Prices to Consider?

According to UK financial services and infrastructure firm NYDIG, while high trading volume in new spot trading can indicate strong investor interest for BTC, it may not necessarily translate to real interest. NYDIG noted that the spot Bitcoin ETF group as a whole has a fund turnover ratio of 5.3%, with Valkyrie (BRRR) and Grayscale's GBTC (GBTC) seeing the lowest ratios at 2.2% and 2.4%, respectively. On the other hand, BlackRock's (BLK) Bitcoin Trust (IBIT) has seen over half of GBTC's volume but has grown from $0 to nearly $7 billion in assets, showing little correlation between volume and inflows. Note that the ratio is calculated by dividing BTC's trading volume by its net asset value (NAV) and has been used as a preferred metric.

In addition, what has been noted as a price driver -the launch of ETFs- is believed to deepen the ties between cryptocurrencies and the traditional financial system. Some experts believe this could create new risks for the broader system, pointing to last year's banking failures involving crypto firms. In simple terms, they see potential crypto crises more likely spilling over now than before.

Apart from the risk from the ETF itself, another risk is a "miner exodus". History shows that the least efficient miners may be forced out after the halving event, triggering a selloff. On the one hand, the upcoming Bitcoin halving event could drive up Bitcoin prices due to a reduced supply of new coins. However, there is debate on whether it is  "priced in" and if it can actually drive prices higher in the aftermath.

While the trend is pointing up, Bitcoin's future remains uncertain and volatility is expected to continue in the longer term on lingering concerns. Long-term concerns include Bitcoin's energy usage, political backlash from governments, and its security model as block rewards decrease over time. Regulations around AML and KYC also pose challenges.

Where Does the Upside Stop According to Analysts

Cryptocurrency investors remain optimistic that Bitcoin's price could surge to over $100000 this year. Some notable predictions include Anthony Scaramucci, who sees bitcoin hitting $100000, and Tim Draper, who expects a $250000 price tag by July. However, the projections should be taken cautiously, as many forecasts have been wrong in the past. (Source: CNBC)

While bullish Bitcoin forecasters expect to see significant gains in 2024, on the opposite realm, bearish proponents are cautioning of downside risks. According to UK fintech firm Finder's study of 40 crypto industry specialists, Bitcoin could fall as low as $20000 should the support at $35734 give way.

Conclusion

Bitcoin surged to a 2-year high on Tuesday, driven by ETF approvals and the looming supply-reducing halving. While some foresee six-figure prices, experts caution about a downside as risks remain around whether this is all "priced in" given increased links between crypto and traditional markets. Miner sell-offs after halvings also pose risks. Although investor optimism exists, volatility is expected to continue, given Bitcoin's uncertain longer-term outlook and challenges around security, regulations, and environmental concerns.