Examine Bitcoin’s evolution, factors influencing its role as ‘digital gold’, and the key narratives shaping its trajectory in 2024.
In 2023, Bitcoin displayed a remarkable rebound, surging more than 150% in value from US$16,000 to over US$42,000, significantly outperforming traditional investments like gold (+13%) and the S&P 500 (+25%). Its resurgence not only increased its crypto market dominance to over 50% of the total crypto market cap, but also marked a significant shift in investor sentiment.
Then again, given its volatile nature, many wonder if Bitcoin can truly serve as a reliable store of value over time.
In this analysis, we’ll dive deep into Bitcoin’s journey, from its evolution to the dynamics shaping it as an asset class, its performance history and what it might mean for you as an investor.
The Bitcoin Evolution
The origins of Bitcoin trace back to a nine-page document published by an anonymous person or entity known as Satoshi Nakamoto, which outlined the concept of a new digital currency that would operate independently of centralised authorities such as banks and governments. Key to its subsequent design is a limited supply of 21 million coins and immutability, with its unparalleled adoption rate distinguishing it from other cryptocurrencies and protecting against inflation and monetary debasement in the fiat world.
Over time, perceptions of Bitcoin as an asset class have evolved across the bull cycles in 2013, 2017 and 2021, with surges of 20-100x at each cycle followed by 75-90% drawdowns, turning it into a sought-after investment despite its early-stage volatility. As interest surged, so did scrutiny and challenges, but such fluctuations are natural for an innovation that’s only 15 years old.
Recently, the perspective on cryptocurrencies, particularly Bitcoin, has shifted significantly, with Blackrock CEO Larry Fink likening them to ‘digitalised gold’. In a July 2023 Fox Business interview, Fink described Bitcoin as ‘an international asset’, suggesting it could serve as an investment similar to gold, offering protection against the economic difficulties of any given country.
This marks a notable change from Fink’s 2017 stance, where he criticised Bitcoin’s association with money laundering, showcasing a significant shift in the financial community’s view towards Bitcoin and its legitimacy as an asset class.
Factors Influencing Bitcoin’s Maturation
Bitcoin’s impressive rally throughout 2023 can be attributed to three main factors. Initially, the cryptocurrency was undervalued following the collapse of FTX in late 2022. Then, events like the US debt ceiling standoff in January 2023 and failures among US regional banks in March 2023 highlighted Bitcoin’s appeal as a safe-haven asset.
Further momentum was gained in the second half of 2023 when financial giants such as BlackRock, Invesco, and Franklin Templeton submitted applications for spot Bitcoin ETFs, bolstering the narrative of Bitcoin as a ‘store of value’, which were granted regulatory approval on 10 January 2024, allowing investors easier access to the cryptocurrency. This move has not only lent credibility to cryptocurrencies but also positioned them as a viable emerging asset class.
While there might be a shift towards even riskier crypto assets in the coming year, it’s anticipated that institutional support for Bitcoin will remain strong, at least through the first half of 2024. Bitcoin has notably outperformed traditional assets in the latter half of 2023, and this trend is expected to carry on into 2024.
Looking Ahead: Where Will Bitcoin’s Price Go?
Beyond the usual fluctuations, Bitcoin’s price trajectory in 2024 is subject to several structural narratives. The first would be the potential for growing institutional adoption, especially after the landmark decision by the US Securities and Exchange Commission to approve 11 spot Bitcoin ETFs in the US.
In the wake of the SEC’s decision, though, Bitcoin was once again a victim of ‘sell-the-news’. BTC fell from a launch-day high of US$49,200 to a low of near US$38,500, though it has since moderately recovered back to its 2023 levels of US$42,500 in the weeks after the ETF launches. Standard Chartered Bank expects that these ETFs could result in up to US$100 billion of new inflows into the space. Naturally, their year-end price target for Bitcoin is also a lofty one at US$100,000.
The second would be the price action surrounding the Bitcoin halving event in mid-April 2024, which will reduce the reward for mining new Bitcoins from 6.25 BTC to 3.125 BTC. Halving has a structural impact in Bitcoin price by systematically reducing the number of Bitcoins that miners receive from mining new blocks, which leads to a halving of selling pressure in this segment of the Bitcoin ecosystem. Pre-halving also leads to short-term selling pressure as Bitcoin miners sell a bit more aggressively to buffer their coffers for more challenging times ahead.
Lastly, macroeconomic factors should also play a role. The risk of higher rates for longer is currently not well priced by the market, which expects the US Federal Reserve to cut rates by 125 basis points in 2024 (vs. the Fed’s own projection of 75 basis points). This should introduce a bit more volatility into prices in the short term, especially if geopolitical risks escalate. Given that it is also an election year in the US, one could reasonably expect that financial conditions will eventually shift to become looser. Asset price performance tends to be backloaded during election years, and Bitcoin could follow this trend.
All in all, further consolidation in Bitcoin’s price looks likely in the near term, with the potential for a new YTD low to be reached. The sell-the-news story in Bitcoin does have legs due to structural reasons, such as outflows from the Grayscale Bitcoin Trust ETF (GBTC) and pre-halving sell pressure from miners. As we cross through the halving and into the May-October presidential year seasonality, we would expect price action to take a more bullish turn, barring unforeseen events. If the previous three Bitcoin cycles are any indication, we will see an all-time high in Bitcoin in the coming one or two years.
Strategies for Incorporating Bitcoin into Investment Portfolios
For investors looking to navigate the Bitcoin market, unsurprisingly, traditional investment principles can be considered, namely:1. Diversification
Bitcoin should form one part of a diversified portfolio, balanced with other asset classes, to manage risk more effectively.According to Modern Portfolio Theory, which has been both theoretically and empirically supported over the past 15 years with Bitcoin, incorporating a high-risk, high-return, uncorrelated asset like Bitcoin can significantly enhance the risk-adjusted returns of portfolios, whether they are conservative or aggressive in nature.
The uncorrelated nature of Bitcoin has proven to (mind-blowingly) reduce volatility in conservative portfolios with somewhere between a 1-2% allocation and with the expected increase in expected return.
2. Risk Assessment
Given Bitcoin’s volatility, investors must carefully evaluate their risk tolerance and investment horizon. This evaluation will help determine the suitable allocation in their portfolio, which may range from low single-digit percentages for conservative investors to up to 10% or slightly more for those with a more aggressive investment strategy.3. Regular Review and Rebalancing
The cryptocurrency market’s dynamic nature requires investors to conduct regular portfolio reviews and rebalancing, ideally on a quarterly basis. This practice ensures that the portfolio maintains the desired risk-return profile over time. Additionally, it enables investors to adhere to the investment mantra of ‘buy low, sell high’, which is equally applicable to cryptocurrencies.
ABOUT THE WRITER
Hann Liew is the founder and CEO of Halogen Capital.
