Bitcoin hit $100,000 for the first time on Thursday, with the cryptocurrency having benefitted from a “Trump bump” in the wake of the US election result. Investors have been following the Bitcoin price for some weeks in anticipation of this moment.
It is a milestone for the asset class, which has been propelled into mainstream conversation in recent years. But investors should remember that Bitcoin is a highly speculative and unregulated investment – meaning it isn’t suitable for all investors and should only ever form a small portion of a broadly-diversified portfolio.
“During the election campaign, Donald Trump promised to make the US ‘the crypto capital of the planet’, build a strategic reserve of Bitcoin if he returned to the White House, and he also set up his own crypto venture,” says Dan Coatsworth, investment analyst at AJ Bell.
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“Traders and investors took this to represent the ultimate endorsement of crypto and piled into Bitcoin as soon as the election result was called.”
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What drives the Bitcoin price – and what are the risks?
This is a perfect example of the sort of environment that drives the Bitcoin price – bullish sentiment.
While sentiment is a driver of all asset classes, investments like stocks and bonds also have market fundamentals that analysts can examine in an attempt to get a better understanding of their ‘true value’.
Each time Apple announces its quarterly earnings, for example, investors can look at its revenue, profit, capital expenditure, cash flow, and more. They can assess the potential impact of any new product releases on the outlook for the share price going forward.
Some stocks also pay a regular dividend. This can help compensate investors when share price growth isn’t strong, or soften the blow of losses.
Meanwhile, there are very few market fundamentals behind the Bitcoin price other than supply and demand. Bitcoin doesn’t have any earnings and it doesn’t pay an income, meaning its value is almost entirely driven by sentiment.
This means cryptocurrencies are highly volatile and large swings in the Bitcoin price can result in devastating losses. If you want to ride the hype, this is a prospect you need to be comfortable with.
So, will the Bitcoin price rise higher? The answer is anyone’s guess, but some analysts say sentiment remains strong.
“US-listed business intelligence group MicroStrategy raised more than $7 billion through issuing shares and convertible bonds, and plans to use the proceeds to buy more Bitcoin on top of the 279,420 units it already owns (worth $28.4 billion),” says Coatsworth.
“That sent a big signal to the market that MicroStrategy remains bullish on the cryptocurrency even after the recent price rise, and investors raced to load up ahead of the company’s signalled buying spree,” he adds.
On top of this, investors expect Trump’s second term to bring a more relaxed regulatory environment, which could prove supportive for the Bitcoin price.
In a recent move, Trump nominated crypto-friendly Paul Atkins to be the next chair of the US Securities and Exchange Commission (SEC), saying on Truth Social that Atkins “recognises that digital assets and other innovations are crucial to Making America Greater than Ever Before”. Atkins will need to be confirmed by the US Senate before securing the role.
This could signal a change in direction when it comes to the regulatory backdrop. Current SEC chair Gary Gensler has taken a cautious stance on crypto, comparing it to the “wild west” on account of the “fraud, scams and abuse” within the asset class. Gensler will step down from his current role on the day of Trump’s inauguration.
What’s next for crypto assets and the Bitcoin price?
Despite the risks, crypto does appear to be solidifying its position in the mainstream. This has made it difficult for regulators and institutional investors to ignore. Here in the UK, the Financial Conduct Authority recently announced a UK crypto regulation roadmap, and plans to make it a fully regulated asset class by 2026.
“Institutional interest and regulatory shifts are adding legitimacy, turning what once seemed like a fringe asset into a force reshaping finance,” says Matt Britzman, senior equity analyst at Hargreaves Lansdown. Whether you love or hate Bitcoin, Britzman says it is “rewriting the rulebook for digital assets”.
If more institutional investors wade into the market as crypto becomes more mainstream, it could prove supportive for the Bitcoin price. We saw something similar at the start of this year when spot Bitcoin ETFs were approved in the US for the first time.
“This development opened the door for a new wave of investors, those who previously maybe were hesitating about accessing crypto wallets or didn't have direct ownership in Bitcoin or access,” says Monika Calay, head of passive strategies for Morningstar.
“Essentially, it brought Bitcoin to the mainstream investment portfolios for the first time. And naturally, the momentum picked up as investors began chasing performance, which increased demand and the price.”
While all of this might sound compelling, it is important to temper your enthusiasm with a careful consideration of the risks. Crypto isn’t suitable for beginners or those who are unwilling to accept large losses.
If you still want some exposure in the hope of benefitting from greater crypto demand, you could consider a small allocation as part of a broadly-diversified portfolio. Traditional assets like equities and bonds should form the main part of your strategy.
