The cryptocurrency market has rebounded sharply over the past year amid signs of economic resilience. Inflation has cooled, recession fears have eased, and the Federal Reserve anticipates some interest rate cuts this year. Low rate environments have historically been a good thing for cryptocurrencies, so investors have returned to the market.
Another reason for the bullish momentum is the enthusiasm surrounding spot exchange-traded funds (ETFs) for bitcoin (CRYPT: BTC) and Ethereum. Those vehicles track (or would track) the price of the underlying cryptocurrency. Bitcoin spot ETFs were approved in January, and while many analysts believe Ethereum spot ETFs will initially be rejected, they anticipate their approval eventually.
Finally, investors are excited about the Bitcoin mining rewards halving planned for this month. It will be the fourth halving event since Bitcoin was created in 2009, and the last three halving events led to significant price appreciation. No doubt investors are hoping for the same outcome this time around.
In that context, Bitcoin skyrocketed 136% over the past year, but some Wall Street analysts see the cryptocurrency moving much more during this market cycle. For example, Tom Lee, managing partner and head of research at Fundstrat Global Advisors, believes Bitcoin could reach $150,000 before the end of 2024 and $500,000 within five years. Bitcoin is currently worth $70,000, so the implied upside is 114% this year and 614% by 2029.
Here's what investors need to know.
Tom Lee has a winning record
Lee rationalized his bullish call bitcoin during a recent CNBC interview. "Demand improves with [spot Bitcoin] ETF supply shrinks with the halving, and if monetary policy eases, which we expect, that supports risk assets," he said in February.
Lee is no stranger to bold predictions. For example, he also told CNBC that the Russel 2000 could shoot up 45% this year. The Russell 2000 is a benchmark for small cap shares, and Lee believes the index is undervalued compared to the long cape S&P 500. Of course, investors should always view predictions with skepticism, but Lee has a reasonably good track record.
He predicted the S&P 500 would rise 24% to 4,800 in 2023 as the Federal Reserve eased interest rate hikes. Lo and behold, the index ended the year at 4,770. Better yet, Lee's stock-picking product (Granny Shots) has more than doubled the performance of the S&P 500 since its inception in January 2019. This is impressive because only 21% of large-cap funds outperformed the S&P 500 in the last five years. .
I mention those achievements not to imply that Lee is right about Bitcoin, but rather to point out that his forecast is worth considering. So, let's talk about the catalysts he believes could send the cryptocurrency to $500,000 in the next five years: Bitcoin Spot ETF and the halving of mining rewards.
The first catalyst: the approval of Bitcoin spot ETFs
Like any asset, Bitcoin prices are determined by offer and demand. However, Bitcoin is a somewhat specialized case because its supply is limited to 21 million coins. That supply limit makes cryptocurrency valuable in the same way scarcity makes precious metals valuable. But scarcity is irrelevant without demand.
With this in mind, several signs currently indicate that demand for Bitcoin is increasing. Long-term holders were net buyers in the fourth quarter. Monthly active addresses, new addresses, and transaction counts have been trending upward. And the number of accounts with at least 0.1 BTC hit a new all-time high in December 2023, according to Fidelity.
In the future, Bitcoin spot ETFs could accelerate demand because they offer direct exposure to the cryptocurrency without the friction of specialized exchanges and blockchain wallets. Additionally, with many of the largest asset managers participating as issuers - including No. 1 Black Rock and number 3 Fidelity: Some analysts believe that institutional investors will become more interested in Bitcoin.
The first Bitcoin spot ETFs were approved by the US Securities and Exchange Commission (SEC) in January 2024, and the launch has been an absolute success. In particular, BlackRock iShares Bitcoin ETF became the fastest to reach $10 billion in assets, according to The Wall Street Journal. That trend could certainly continue in the future, especially after institutional investors have had time to study the market.
The Second Catalyst: Bitcoin Mining Rewards Halving
The April 2024 halving event is the next catalyst on the horizon. Halving events enforce the 21 million coin limit through scheduled reductions in mining rewards. Miners receive Bitcoin when they successfully validate blocks of transactions, but the payment is reduced by 50% each time 210,000 blocks are added to the blockchain. That happens about once every four years.
Halving events temper selling pressure, simply because miners have less Bitcoin to sell. As a result, Bitcoin has become much more valuable after the three previous halving events, which took place in 2012, 2016 and 2020. Its price increased by 5,300% between the first and second halving, and by 1,200% between the second and third half. Bitcoin has returned 715% since the third halving event.
Investors should never be anchored to price targets
Lee's forecast has merit and Bitcoin could certainly be worth more (perhaps much more) in the future. However, investors should never fixate on specific price targets. Forecasts are inherently unreliable, even when based on decades of data. But Bitcoin has only been around for about 15 years, so forecasts for the cryptocurrency are especially questionable.
Additionally, investors should remember that Bitcoin has historically been a very volatile asset. For example, its price plummeted 76% between November 2021 and November 2022. Similar volatility can be expected in the future.
Here's the bottom line: There's no guarantee that Bitcoin will get close to $500,000 in the next five years, but it has created substantial wealth in the past and could create more wealth in the future. Patient investors who are comfortable with extreme risk and volatility should buy a small position in Bitcoin today.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool holds and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
