This coming new year could be a big one for bitcoin and the cryptocurrency market. And crypto enthusiasts are optimistic after what has been quite a fruitful 2023 for the digital assets space.

To understand what may lie ahead for the industry, it is crucial to note the momentum that bitcoin and cryptocurrencies more generally have heading into 2024. This week, bitcoin punched above $44,000 — the price of bitcoin is now the highest it has been since April 2022.

HOME ECONOMICS: THE HUMAN COST OF THE AFFORDABILITY CRISIS

As of Dec. 5, bitcoin was up nearly 16% over just the previous five days and offered nearly 25% returns in the past month alone — spectacular growth for such a short period. This year has been a bountiful one for the flagship cryptocurrency, which had an awful 2022. In 2022, bitcoin lost more than 65% of its value, causing some investors to flee the crypto markets.

But this year, since the start of 2023, bitcoin has posted a remarkable 163% gain, nearly erasing the hole that was made the year before.

So there is underlying momentum and hope heading into the new year. Although outside of just momentum and investor optimism, there are some major developments on the horizon for the crypto space in the coming months.

Approval of ETFs
Perhaps the factor most closely associated with bitcoin’s growth and the possibility of more growth soon heading into 2024 is the approval of the first bitcoin exchange-traded funds. The Securities and Exchange Commission is still mulling over the decision to greenlight about a dozen such applications, and many in the crypto community think that it likely will give them the OK, something that would be a shot in the arm for the digital asset.

For instance, BlackRock’s much-anticipated “iShares Bitcoin Trust” invests directly in bitcoin rather than futures tied to it. It is one of the applications being considered, and investors became even more excited this week when it was revealed in a filing that it received $100,000 in “seed capital” from an investor.

Most in the crypto world think that at least some of the ETF applications will get approved. Bloomberg Intelligence analysts said in a recent note that they expect the SEC to approve all of the applications.

James Lawrence of Siesta Markets told the Washington Examiner during an interview that approval would be good news for the crypto markets, although even if they got rejected, he thinks the downturn would not be long-lasting given the global appeal of bitcoin and cryptocurrency.

“But if it does get approved, I think that is a major signal for the world’s big money managers that, hey, the U.S. is greenlighting digital assets officially and essentially it’s open season for one of the largest capital flows into digital assets yet,” he said, noting how it sort of opens the floodgates.

“I think it’s absolutely huge once they approve it, but if they don’t approve it, I think it’s just more of the same — people will blink for a day or two and the world moves on,” Lawrence added.

The Federal Reserve and interest rates
Since March 2022, the Fed has been driving up interest rates to levels not seen in years. The idea is that the higher rates (the Fed’s target rate is now 5.25% to 5.50%) would help tamp down inflation, although the side effect of such tightening is downward pressure on the economy.

The tightening also shone through in the cryptocurrency markets. As rates rose quickly in 2022, bitcoin and other major cryptocurrencies flagged as investors, fearing a potential economic downturn, fled from risky asset classes into safer ones. But as the Fed has driven up rates, a major economic downturn, and certainly a recession, never came to fruition.

Now that the Fed has meaningfully brought inflation down (it is running at just around 3% depending on the gauge), it appears poised to be finished with its tightening and might be eyeing rate cuts as soon as the first quarter of 2024. So now there is a sense of optimism that the economy might have gotten through the tightening without a recession, a scenario referred to as a “soft landing.”

Traditional assets like stocks tend to gain momentum when the Fed appears poised to cut rates, and with the possibility looking ever more likely, there has been a bit of a cross-asset rally for both bitcoin and the stock market. For instance, in the past month alone, the S&P 500 has risen by more than 4.6%.

Investors now see a 57% probability that the Fed will cut rates as soon as March, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.

The bitcoin halving
The bitcoin halving is an event that will take place in a few months that perhaps many casual bitcoin investors aren’t even aware of, although it could bode very well for bitcoin and other cryptocurrencies throughout 2024 and maybe even beyond.

With bitcoin, about every four years, the block rewards for bitcoin miners get slashed in half, reducing the supply of new bitcoins by 50%. This is known as halving. Jim Harper, a nonresident senior fellow at the American Enterprise Institute, told the Washington Examiner earlier this year that such highly anticipated halving events can drive up the price of the digital asset.

“That creates essentially a supply shortage with less bitcoin coming into existence — it becomes less inflationary or more deflationary. ... There’s just less of it around,” Harper explained. “That tends to create a sense of shortage, and in classic supply and demand terms, it just tends to drive the price up.”

Lawrence said that historically the months leading up to such four-year halving events and the months after them tend to be very volatile, although the approximately 18 months after the halving usually is a bull market for bitcoin.

“It’s just kind of a continuation of bitcoin getting more and more scarce,” Lawrence said. He noted that it costs a certain amount of energy to mine a bitcoin and that because that energy cost will now be doubled, it will cost two times as much now to produce the digital asset.

Potential downsides
While there is a healthy amount of optimism for bitcoin and crypto heading into the new year, there are some unknowns that could cause the digital asset’s value to falter.

One of the main uncertainties has to do with regulation. For instance, global bitcoin prices sputtered when China banned all crypto transactions back in 2021, and the price of bitcoin has lowered when U.S. regulators have slammed major crypto exchanges.

U.S. regulators under President Joe Biden have been fairly aggressive against the crypto industry, and the SEC has filed several high-profile lawsuits against major firms. Among the companies that the SEC has targeted are Binance, Coinbase, and Kraken.

Cryptocurrency advocates have panned the SEC as too heavy-handed or as regulating by lawsuit.

Still, Lawrence said he thinks potential U.S. regulatory actions would only have a short-term impact on price given the global nature of cryptocurrency.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

John Berlau, a senior fellow and director of finance policy at the Competitive Enterprise Institute, told the Washington Examiner that the “arbitrary actions” of federal agencies could cause sudden downward price movements against some of the significantly sized, but non-bitcoin, cryptocurrencies.

But Berlau said that he thinks some of the actions of the SEC and Department of Justice against bad actors like disgraced FTX founder Sam Bankman-Fried have actually been a boon for bitcoin and crypto because it renews confidence that the crypto industry isn’t the wild west and there are guardrails that work.