Bitcoin has surged back to prominence, surprising many investors who had written off cryptocurrencies after a series of high-profile frauds and disasters caused values to plummet by roughly 75% from late 2021 through 2022.
Recent data, however, is hard to ignore. Since hitting a low of $16,000 in November 2022, Bitcoin has rebounded strongly, breaking through the $70,000 barrier for the first time in March this year. Like it or not, even after recent pullbacks, this unpredictable currency remains one of the top-performing assets of the year and the past decade.
Several factors have driven Bitcoin's rise, but one of the most significant is the ability to invest via exchange-traded funds (ETFs). This method is far safer and more accessible for newcomers. Established financial brands like BlackRock and Fidelity have entered the ETF arena, lending legitimacy to a space still viewed by many as the domain of rogues and gamblers. In the coming months, the halo effect of these major asset managers may expand further as they begin incorporating Bitcoin ETFs into some model portfolios recommended to investment advisors.
For newcomers wondering if now is a good time to invest, understanding how Bitcoin and other cryptocurrencies work, as well as the forces behind the recent rally, is crucial.
What Makes This Rally Different?
Bitcoin first emerged after the 2008 financial crisis when governments worldwide printed massive amounts of money to support their banking systems. Its anonymous creator, Satoshi Nakamoto, envisioned it as a decentralized form of currency with a fixed supply, immune to inflation or political control. The design caps Bitcoin production at 21 million coins by 2140. Over 90% have already been issued, and after the next "halving" event scheduled for April 20 this year, future supply will become even more constrained, significantly slowing the rate of new coin production.
Scarcity is a key part of Bitcoin's appeal and why supporters hail it as "digital gold." In fact, in March, the cryptocurrency's market capitalization surpassed that of silver for the first time, exceeding $1.4 trillion.
However, Bitcoin is far more volatile than gold or silver and is prone to spectacular crashes. The current bull market follows three previous frenzies—each followed by a staggering collapse.
Notably, each crash roughly coincided with major news events. In 2014, the Mt. Gox exchange suffered a catastrophic hack; it was a primary source of industry liquidity at the time. In 2017, the bubble burst shortly after the U.S. Securities and Exchange Commission (SEC) released a report signaling a regulatory crackdown. Finally, the COVID-19 era high of $69,000 was erased by a disastrous crash, partly triggered by a wave of fraud that ultimately led to the collapse of the FTX exchange and the arrest of its founder, Sam Bankman-Fried, in December 2022.
In summary, the highs and lows of the crypto market have historically been driven by a combination of factors rather than a single event (other elements include high interest rates, technological leaps, and investor herd mentality). The current rally, which began in the summer of 2023, is also fueled by several catalysts, particularly a series of U.S. court rulings that weakened the SEC's anti-crypto policies and the November 2023 conviction of Bankman-Fried, which many saw as a turning point for the embattled industry.
So far, however, the strongest catalyst has been the launch of Bitcoin ETFs in January this year, which for the first time allowed investors to gain crypto exposure on major stock exchanges. Their introduction unleashed a wave of pent-up demand: by mid-March, new ETFs had attracted over $10 billion in net inflows, and Bitcoin's price climbed 50% in just two months.
To date, BlackRock's IBIT, Fidelity's FBTC, and ARK Invest's ARKB have captured the largest share of flows. Other firms offering Bitcoin ETFs include traditional finance companies Franklin Templeton and Van Eck, as well as four native crypto companies. Nearly all offer ultra-low fees typical of ETFs, ranging from 0.19% to 0.3% of assets under management.
Bitcoin's move into the mainstream has been a major help: while there are still prominent critics, including Warren Buffett and JPMorgan Chase CEO Jamie Dimon, it's hard to find detractors under the age of 50. For younger investors, Bitcoin's 15-year history makes it feel less unfamiliar or untested. Still, not all Wall Street players are convinced it's a sound investment. Most notably, Vanguard has not only stayed on the sidelines but also refuses to let its clients buy ETFs from other firms. In a recent blog post, the nonprofit investment giant called Bitcoin "an immature asset class with a brief history, lacking intrinsic economic value and cash flow, which could wreak havoc in a portfolio."
Evaluating the Risks
Vanguard's view may be pessimistic, but it highlights why investors should proceed with caution. Whether to join the recent investment wave ultimately depends on your tolerance for risk and volatility.
Of course, putting all or most of your wealth into any single cryptocurrency—or any single investment outside your home—would be unwise. But even a small allocation to Bitcoin can have an outsized impact on a portfolio. Bryan Armour, Morningstar's director of passive strategies research, points out that while stocks have historically been considered the riskiest assets, Bitcoin's volatility over the past five years has been four times that of the U.S. stock market. Armour explains: "Adding a 5% Bitcoin allocation to a [60% stock/40% bond] portfolio brings its risk profile closer to that of a [90% stock/10% bond] portfolio." A 10% Bitcoin allocation "would far exceed the volatility of a 100% S&P 500 portfolio."
Others argue that Bitcoin should hold its value under extremely adverse economic conditions. Stephane Ouellette, CEO of digital asset trading platform FRNT Financial, says Bitcoin suits anyone seeking a hedge against "disruption of the existing financial system."
For those inclined to take the risk, buying a Bitcoin ETF through a brokerage is likely the simplest option. Investors can also purchase Bitcoin directly on platforms like Coinbase or Robinhood. For those primarily seeking protection from a financial system collapse, holding assets directly on a flash drive is an option; this requires technical savvy and, of course, leaves you to fend for yourself if scammers or hackers attempt to steal your crypto.
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A final question is whether it's wise to buy Bitcoin near its all-time highs. The upcoming halving has partly driven the recent rally. But JPMorgan analysts warned in late February that the potential gains from the halving may already be priced in, and once the ETF frenzy subsides, Bitcoin's price could fall to $42,000.
Moreover, if unforeseen events—hacks, prosecutions, regulatory obstacles—undermine investor confidence, scarcity alone won't support Bitcoin's price. With Bitcoin, even more than with most investments, past performance is no guarantee of future results.
Frequently Asked Questions
What is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. It allows investors to gain exposure to Bitcoin's price movements without directly owning the cryptocurrency, through traditional brokerage accounts.
How do Bitcoin ETFs differ from owning Bitcoin directly?
Bitcoin ETFs are traded on traditional stock exchanges and are subject to regulatory oversight. They eliminate the need for managing private keys, using crypto wallets, or navigating crypto exchanges, reducing security risks and complexity for investors.
Are Bitcoin ETFs a safe investment?
While Bitcoin ETFs offer a more regulated and accessible way to invest, they still carry significant risks due to Bitcoin's inherent volatility. They are not risk-free and should be considered a high-risk component of a diversified portfolio.
What factors should I consider before investing in a Bitcoin ETF?
Consider your risk tolerance, investment horizon, and overall portfolio strategy. Understand that Bitcoin is highly volatile and influenced by regulatory news, market sentiment, technological developments, and macroeconomic factors.
Can Bitcoin ETFs be part of a long-term retirement portfolio?
Some investors include a small allocation to Bitcoin ETFs for potential growth, but due to their high risk and volatility, they are generally not recommended as a core holding in conservative long-term retirement portfolios.
How does the Bitcoin halving affect its price?
The halving reduces the rate at which new Bitcoins are created, decreasing the available supply. Historically, this event has been associated with price increases due to the reduced supply, but past performance does not guarantee future results.