Cryptocurrencies are surging again. Bitcoin has just hit an all-time high of more than US$72,000 (£56,300), pushing past the level of circa US$69,000 where it turned back during its last bull phase in late 2021.
Other top cryptocurrencies like ethereum and solana have reached their highest prices in three years, on the back of a run that has been going since the autumn. The value of the whole cryptocurrency market has raced up to US$2.6 trillion, triple what it was worth at the beginning of 2023 and not far off its previous US$3 trillion peak.
Much of this run has occurred at a time when the US dollar has been strengthening against other currencies (though it has fallen in the past couple of weeks). This can often be a time when cryptocurrencies get weaker, so it shows how strong they have been lately.
Many other fiat currencies around the world have been losing value against the US dollar during this period, so bitcoin reachedall-time highsin many of them long before it finally took out its high in the US currency.
So what has contributed to this explosion in prices and where is the market going for the rest of 2024?
Bitcoin ETFs
A major driver for this appreciation in prices has been theUS authorities’ approvalin January of an investment vehicle known as an exchange-traded fund or ETF for the general or “spot” bitcoin market. An ETF is an easy way for the average saver to get exposure to an asset, since they buy shares in the vehicle, usually through their financial advisor, rather than having to go to the trouble of buying the underlying asset.
A total of 11 bitcoin ETFs were approved in the US, and their daily trading volume has nowexceeded US$10 billion– driven by frontrunnersBlackrock and Fidelity Investments. This demonstrates the large interest from traditional market participants, and as the spot ETFs become more mature, their providers will offer more promotional material and education to get more customers onboard.
The cryptocurrency market is always adapting and innovating, and one possible future innovation is the offer of option contracts on the new spot ETFs. Options allow traders to hedge their bets on whether the crypto market will go up or down, and would likely attract even more new money into the space.
However, US regulator the Securities and Exchange Commission (SEC) hasjust postponeda decision on this innovation until late April. Someexperts thinkapproval may take longer than that as it is unclear which regulatory body would be responsible for policing this new class of derivative contracts.
The bitcoin halving
One featureof the bitcoin system which was built in at the beginning is that, roughly every four years, the rewards to companies using arrays of computers to create or “mine” bitcoin get cut in half.
The last halvingtook placein May 2020, where miners went from receiving 12.5 bitcoin for each unit of work they do to 6.25 bitcoin. The next is due to take placeon April 19, cutting the reward down to 3.125 bitcoin.
Because each halving means less new bitcoin coming on to the market, they havecoincided withstrong price appreciation in the cryptocurrency. What isn’t clear is whether this is already priced in and therefore not actually the reason price is going up.
One theoryis that the institutions behind the spot ETFs are buying aggressively now because they know there will be less bitcoin on the open market once the halving takes place.
Ethereum prospects
Meanwhile, the crypto market could also be boosted by spot ETFs for the ethereum cryptocurrency system in the coming months. At least ten firms, including Blackrock and Fidelity, have applied to launch them and the SEC has until May to make a decision.
Whereas the online ledger that underpins bitcoin, known as its blockchain, has been seen largely as a store of value, ethereum has become the leading blockchain for developers to write applications using this technology.
SEC ChairGary Gensler believesthat most cryptocurrencies should be treated differently to bitcoin, as financial instruments known as securities rather than as more straightforward commodities. This adds complexity to the ethereum ETF approval process. If the US authorities were to decide it was the case,it would meanthat ETFs couldn’t buy ethereum from crypto exchanges until those exchanges had received approval to trade it as a security.
While that uncertainty continues, ethereum could be boosted by the so-calledDencun upgrade(also known as Duncan or EIP-4844). Ethereum has competition from other blockchains such as solana and avalanche due to its relatively slow transaction speed and high costs.
It already completed its first major step in a long-term plan to reduce costs and cope with many more users (known as scalability) when it transitioned in 2023 to a different system for verifying transactions known asproof of stake. The Dencun upgrade, which goes live on March 13, will further improve scalability by making data storage more efficient on the network, while also lowering transaction fees.
Where next
Predicting cryptocurrency prices is not for the faint-hearted. The market is very volatile, and often exceeds expectations when it goes up or down. The behaviour of individuals determines market prices and, asIsaac Newton put it, you can “calculate the motions of heavenly bodies, but not the madness of the people”.
However, themajority of commentatorsexpect crypto prices to keep rising over the coming months.Election years tendto be good for investments in general, while asecond Trump administrationwould probably create amore favourableregulatory environment for crypto assets (as would aRishi Sunak victoryin the UK, however unlikely that seems at present).
As bitcoin becomes more and more mainstream and integrated with traditional assets, it isn’t inconceivable that it could hit US$100,000 in 2024 – an extraordinary feat for a invention that was worth nothing as recently as 2009.
Andrew Urquhart is Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of Reading.
This article is republished from The Conversation under a Creative Commons license.
