Bitcoin is still the best all-around cryptocurrency for long-term investors.
Bitcoin (BTC -1.95%) has gone through some wild swings over the past three years. The world's top cryptocurrency hit $69,000 in November 2021, plunged below $16,000 a year later, then surged to a record high of $73,750 this March. But as of this writing, Bitcoin's price has pulled back to about $64,000.
Those wild price swings might make Bitcoin seem like a risky investment for smaller retail investors. But with just $1,000, investors can still buy fractional Bitcoins or shares of Bitcoin exchange-traded funds (ETFs). Let's review the main factors driving Bitcoin's volatile price swings -- and why it's still a good idea to invest at least $1,000 in the cryptocurrency.
What happened to Bitcoin over the past three years?
Back in 2021, a combination of stimulus checks, the growing popularity of free trading platforms like Robinhood Markets, social media buzz, and a fear of missing out (FOMO) sparked a buying frenzy in meme stocks and cryptocurrencies. Low interest rates also made it easy to fund the development of speculative cryptocurrency projects.
But in 2022, inflation drove the Federal Reserve to aggressively hike its benchmark interest rates to their highest levels in over two decades. Those sudden rate hikes drove investors toward more conservative investments and started a "crypto winter" that chilled the market's demand for Bitcoin and other cryptocurrencies.
Yet Bitcoin's price stabilized and more than doubled over the past 12 months as three tailwinds kicked in. First, the U.S. Securities and Exchange Commission (SEC) approved the first 11 spot price Bitcoin ETFs this January. Those approvals made it much easier for retail and institutional investors to invest in Bitcoin, and the six largest spot price ETFs now hold a combined $58 billion in assets under management. Hong Kong's Securities and Futures Commission (SFC) is also reportedly getting ready to approve the region's first spot price ETFs for Bitcoin and Ethereum.
Second, the bulls looked toward Bitcoin's next "halving," which reduces the rewards for mining Bitcoin in half every four years. The next halving will occur around April 19 or 20, and that reduced supply should stabilize Bitcoin's market price.
Lastly, the Fed could cut interest rates this year if inflation cools off. If that happens, investors could pivot toward Bitcoin and other cryptocurrencies again. Lower rates should also soften the strong dollar and boost Bitcoin's value in U.S. dollars.
Why could Bitcoin's price stay volatile throughout the rest of 2024?
Those long-term catalysts could eventually drive Bitcoin's price to fresh highs, but the cryptocurrency could face some unpredictable headwinds throughout the rest of the year.
Federal Reserve Chairman Jerome Powell recently warned of a "lack of further progress" in his goal of achieving a 2% inflation rate. That grim statement suggests the Fed isn't eager to cut interest rates yet -- and investors could back away from Bitcoin and other cryptocurrencies as long as those rates stay elevated.
Meanwhile, many of Bitcoin's catalysts -- including its ETF approvals, institutional purchases, and halving -- might already be baked into its price. Therefore, a lack of near-term tailwinds could cause Bitcoin's price to stagnate or slump this year.
Why should investors still invest $1,000 into Bitcoin today?
But despite those near-term challenges, I believe it's still smart to invest $1,000 into Bitcoin or a Bitcoin ETF and simply forget about your investment for a few decades. During that period, inflation should erode the value of the U.S. dollar and other fiat currencies -- while Bitcoin, gold, silver, and other assets should retain their value or become more valuable.
Once Bitcoin's price stabilizes, more businesses should accept it as a payment option. Its ability to circumvent unfavorable foreign exchange rates could make it a popular option for cross-border commerce, while countries dealing with crippling inflation could follow El Salvador's lead and adopt Bitcoin as a national currency. Simply put, a $1,000 investment in Bitcoin today could generate life-changing gains in just a few decades -- but only if you ignore its near-term swings.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
