April 13, 2024
Crypto

Mint Explainer: What’s behind the surge in bitcoin prices


After rising by more than 150% in 2023, the price of bitcoin surpassed $45,000 on the second day of 2024, to its highest level since April 2022. Bitcoin is the world’s first cryptocurrency and the largest by market capitalisation. Many analysts and industry experts expect the rally to continue in the current calendar year, with some expecting bitcoin to rise to $100,000 in the coming months. (Although the price fell nearly 11% on Wednesday before bouncing back to $42,200, as per CoinDesk data. On Thursday morning in India, bitcoin was at about $43,100.)

After rising by more than 150% in 2023, the price of bitcoin surpassed $45,000 on the second day of 2024, to its highest level since April 2022. Bitcoin is the world’s first cryptocurrency and the largest by market capitalisation. Many analysts and industry experts expect the rally to continue in the current calendar year, with some expecting bitcoin to rise to $100,000 in the coming months. (Although the price fell nearly 11% on Wednesday before bouncing back to $42,200, as per CoinDesk data. On Thursday morning in India, bitcoin was at about $43,100.)

Bitcoin last rose to its all-time high of $68,789 in November 2021 and then fell to a low of $15,760 in December 2022 amid the collapse of FTX, the largest cryptocurrency exchange, and fraud charges pressed by the US Securities and Exchange Commission against its CEO Samuel Bankman-Fried, fears of worsening macroeconomic conditions and rising interest rates.

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Bitcoin last rose to its all-time high of $68,789 in November 2021 and then fell to a low of $15,760 in December 2022 amid the collapse of FTX, the largest cryptocurrency exchange, and fraud charges pressed by the US Securities and Exchange Commission against its CEO Samuel Bankman-Fried, fears of worsening macroeconomic conditions and rising interest rates.

The latest rally was triggered by impending developments–the halving of bitcoin rewards and the potential approval for a spot bitcoin exchange-traded fund in the US. The US Federal Reserve signalling interest rate cuts in 2024 has also helped the rally. Mint explains the factors behind the recent rally.

What is halving of bitcoin rewards and how does it affect the price?

The creators of bitcoin designed the cryptocurrency with a cap of 21 million to limit its supply, which they felt would create a scarcity as demand rises and thus push up its value. So far, 19.6 million have already been mined, and 900 bitcoins are added per day currently. Crypto miners are rewarded 6.25 bitcoins at present for every block they create and a new block is produced approximately every 10 minutes.

The code written by the inventors of bitcoin requires the rewards per block to be halved every time 210,000 blocks are added–which usually happens every four years. This halving of rewards is expected to happen in April-May, and the number of bitcoins rewarded per block created will drop to 3.125.

The number of bitcoins minted per block was 50 when it was created. The rewards were previously halved in 2020, and before that in 2012 and 2016. The final halving will happen around 2140, after which it will not be possible to halve the rewards. At that point, the number of bitcoins in circulation is expected to be about 21 million.

The halving of bitcoin rewards per block slows the increase in the supply of the cryptocurrency. As a result, bitcoin prices usually start to rise much before the halving event and usually soar after the halving takes place.

For instance, in the 12 months following the last halving in 2020, bitcoin gained about 560%. Similarly, in the 12 months after the first halving in 2012, bitcoin jumped more than 8,000%. If the same trends persist, bitcoin may soar to the levels projected by various industry experts and analysts.

Why are investors looking forward to spot bitcoin ETF?

The US SEC has until 10 January to approve proposals of asset managers to launch spot bitcoin exchange-traded funds. There are over a dozen applications before the markets regulator. It is widely anticipated that the SEC will approve the ETF proposals much before the deadline (it may come this week), even though it has not given any indications whether it will indeed approve the applications.

A regulated product like an ETF could encourage a lot more people and institutions to invest in bitcoins. Some estimate that about $3 billion may flow into the ETF products in the US on the first day.

Among those that have filed applications to launch ETFs based on the spot prices of bitcoin are Ark Investment, Franklin Templeton, BlackRock, Invesco and Fidelity.

Unlike the bitcoin futures ETF, which involves investment in futures contracts, spot ETFs invest in the cryptocurrency directly. Investors in the US can currently invest in bitcoin futures ETF, which were first launched in October 2021. Most of the asset managers who have sought SEC approval for spot bitcoin ETFs already run bitcoin futures ETFs.

Can the easing of interest rates also boost bitcoins?

Rising interest rates affected cryptocurrencies like all other asset classes that are risky. When the Fed held rates steady at its December meeting, cryptocurrencies gained.

More significantly, investors have been increasing their exposure to cryptos after a rough 2022, when stablecoins Terra and Luna crashed and the FTX scam came to light. With the Fed signalling that rate cuts may begin sometime in 2024, investors will be willing to increase their investment in risky assets such as cryptos.

While there is a lot of optimism around bitcoin at this point, another FTX-like bankruptcy or a scam can cause the cryptocurrency market to crash like it did in 2022. Most of these catch investors unaware, leading to deep losses.



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