Mint Explainer: What's caused bitcoin to surge past $50,000?

A higher flow of funds into the cryptocurrency since the US Securities and Exchange Commission (SEC) approved the launch of bitcoin spot ETFs in January is seen as the main trigger for the latest rally, which started about a week ago. 

Bitcoin surged 150% in 2023 partly in anticipation of bitcoin spot ETFs by early 2024. Its price has risen another 16% so far this year (as of 13 February), helping many who stayed invested to recoup some of their losses from the 2022 crash.

Other than higher inflows, which have been led by institutional investors, the anticipation of cues from the US Federal Reserve on when it might start cutting interest rates, and the imminent halving of bitcoin rewards in April-May are triggers for the latest rally. These developments are expected to push the price of bitcoin higher in 2024. The next meeting of the Federal Open Market Committee is scheduled for 19-20 March.

The SEC approved 11 spot bitcoin ETFs on 10 January. Nine bitcoin spot ETFs were launched the following day, and Grayscale Bitcoin Trust was also turned into an ETF the same day. However, the price of bitcoin tumbled 20% from $49,000 on the day of the spot ETF launch to below $40,000 by 22 January. The cryptocurrency then began a steady rise on 26 January.

The price of bitcoin hit an all-time high of $68,789 in November 2021 before crashing to $15,760 in December 2022 amid the collapse of FTX, then the world’s second-largest cryptocurrency exchange, and charges of fraud against its CEO Sam Bankman-Fried. Fears about worsening macroeconomic conditions and rising interest rates also contributed to the collapse.

Now back around $50,000, bitcoin has come a long way since those dark days. Mint explains why bitcoin is surging again.

Higher inflows

The recent surge in bitcoin prices was driven by an estimated $1.1 billion flowing into ETFs during the past week — the highest weekly inflow since the launch of bitcoin spot ETFs. This inflow has seen ETFs collectively amass 200,000 bitcoins, pushing up the price of the digital asset, which has a limited supply and a cap on the number of new tokens added every day. More funds are expected to flow into bitcoin spot ETFs in the coming weeks and months as it becomes a mainstream asset class in investors’ portfolios.

Imminent halving of rewards

While demand is rising, supply is set to be further restricted in about two months. The creators of bitcoin designed the cryptocurrency to have an upper limit of 21 million coins, which they felt would create a scarcity and thus push up its value. So far, a little over 19.6 million have been ‘mined’, and 900 bitcoins are currently added every day. A new block is added to the chain once about every 10 minutes, and crypto miners are rewarded with 6.25 bitcoins at present for every block they create.

Bitcoin’s inventors designed this reward to halve every time 210,000 blocks are added to the chain, which usually happens every four years. This next halving of rewards is expected to take place in April-May, so miners will receive only 3.125 bitcoin per block until the next halving.

As the halving of bitcoin rewards slows the increase of the cryptocurrency’s supply, its price usually starts to rise well in advance, and soars after the halving. For instance, in the 12 months after the most recent halving in 2020, bitcoin gained about 560%. And in the 12 months after the first halving in 2012, it jumped more than 8,000%.

Expectation of rate cuts

Rising interest rates affect cryptocurrencies, as they do all risky assets. When the Fed kept rates steady at its December meeting, cryptos gained. If it now signals that rate cuts may begin as early as June 2024, as some analysts expect, investors are likely to increase their allocation to risky assets such as crypto. That could trigger another rally in the price of bitcoin and other crypto assets.