Should You Buy Bitcoin Now That It’s On Fire Again? How to avoid getting burned.
The first is that there is logic to Bitcoin’s rise, topping $30,000 for the first time since last June. Crypto has long served as an extension of technology, which was hit by rising interest rates. Hopes are now high that the Federal Reserve is almost done raising interest rates, spurring gains in tech stocks and “risk assets” like crypto.
“A reversal or pause from the Fed will strengthen risk assets, including Bitcoin,” said Alex Thorn, head of research at crypto financial services group Galaxy Digital.
Crypto traders can also expect tighter supplies of Bitcoin issuance. The software code underlying the token periodically halves the amount of new Bitcoins produced through the process of “mining” or processing transactions on the blockchain network. The next halving event is scheduled to take place in April or May 2024, reducing the mining “rewards” from 6.25 to 3.125 Bitcoins for each block of transactions.
“We’re about a year away from Bitcoin’s next halving. Historically, these have been positive events for the digital resource, says Thorn.
Bitcoin, and crypto more generally, may have been overdue for a rally following a bear market that wiped out more than $2 trillion in token value, pushing Bitcoin to lows around $16,000 last year. A series of bankruptcies, frauds and corporate collapses, punctuated by the implosion of Sam Bankman-Fried’s FTX, sharply reduced demand and trading volume.
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Another factor driving Bitcoin could be the recent banking panic, including the failures of Silicon Valley Bank and Signature Bank. Crypto apostles have long argued that bank deposits are not as safe as Bitcoin, which a person can own directly through a digital wallet, rather than relying on a bank or middleman.
In reality, digital deposits have proven to be far less secure than dollar deposits held in banks. Crypto traders have lost billions of dollars worth of tokens through hacks, scams and the collapse of exchanges like FTX. While it is possible to keep your crypto locked in a digital wallet, to which only you have the keys, many traders offload their tokens to exchanges, which may not keep customers’ assets segregated, turning depositors into creditors in a bankruptcy proceeding.
These are signs that another crypto bubble is inflating. One indicator is that the number of digital wallets containing small amounts of Bitcoin has increased much faster than those holding larger amounts. It could be a sign that the rally is being driven by small traders, similar to the “meme stock”.
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The number of wallets holding at least 0.01 Bitcoin — about $300 — has risen more than 3% since the start of the year, according to crypto data group Messari. Growth slows as wallets get bigger: The number of wallets containing at least one Bitcoin has grown around 1.5%, while wallets with more than 10 Bitcoins have increased by just 0.5%.
Analysts also see targets for Bitcoin that suggest the rally may fizzle out in the short term. Katie Stockton, a technical analyst and managing partner at Fairlead Strategies, sees Bitcoin’s upside resistance near $35,900, while the support level is at $25,200. “We will maintain strict attention to risk management,” Stockton said.
Even crypto bulls see muted gains in the short term.
“I expect Bitcoin to trend between $25,000 and $35,000 until the end of November,” said Sam Yilmaz, co-founder of venture fund Bloccelerate. However, Yilmaz is more bullish on the longer term: “Once the halving has taken place, Bitcoin will be in pieces for the next 12 months, going above $150,000,” he predicted.
Ultimately, investors must grapple with some critical questions, including the eternal confusion of why prices are behaving the way they are and whether the recent momentum can continue. A far tougher regulatory climate is also emerging in the US with agencies such as the Securities and Exchange Commission taking an increasingly hard line on even “blue-chip” crypto companies, which
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Coinbase Global (COIN).
“The current price pattern is expected to generate … FOMO [fear of missing out] among investors, many of whom have already missed it,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.
There are reasons why an investor might want to get into crypto now: as an expression of risk-on sentiment, a bet on a policy pivot from the Fed, or conviction that Bitcoin will one day fulfill its promise as a real alternative currency and asset. However, the latter could be FOMO, and that’s as risky as ever.
Write to Jack Denton at [email protected]
