The crypto industry is in the dumps. So why is bitcoin suddenly flying high?
Although the cryptocurrency industry remains shadowed by recent blowups and controversy, the world's most important token — bitcoin — is making a comeback.
The value of bitcoin soared to nearly $42,000 on Monday, marking the first time the digital currency cracked $40,000 in 18 months, price tracker CoinDesk Indices shows.
The resurgence stands in contrast to the questions that have dogged the sector since last year's spectacular flameout of crypto exchange FTX, leading to the November conviction of founder Sam Bankman-Fried on seven counts of fraud. Also last month, Binance — the world's largest cryptocurrency exchange platform — agreed to pay $4.3 billion after admitting that it violated U.S. laws to prevent money laundering and sanctions violations, with CEO Changpeng Zhao pleading guilty to one federal charge.
Despite such scandals, bitcoin's priced has soared 150% this year, although it remains down from a high of roughly $69,000 in late 2021.
What is bitcoin again?
Bitcoin is the first cryptocurrency and was created in 2009. Cryptocurrencies are digital tokens that use peer-to-peer technology to facilitate instant payments without the need of a third party such as a bank or payment processor, according to bitcoin's pseudonymous creator, Satoshi Nakamoto.
Unlike traditional money, cryptocurrencies can be used to purchase goods and services on the internet, in addition to being held as investments (like stocks). However, crypto prices are notoriously volatile, and investing in any kind of crypto can be risky, according to investment firm Charles Schwab.
There are more than 11,000 cryptocurrencies, but bitcoin is the most valuable (in dollar terms), in addition to having the largest market capitalization of any digital asset, data from crypto price tracker CoinGecko shows.
Why is bitcoin surging now?
Several factors are fueling bitcoin's latest rally. Perhaps the most important are signs that major investment firms are set to get regulatory approval to offer spot bitcoin exchange traded funds — a pooled investment security that can be bought and sold like stocks. Federal regulators are expected to give the green light for several bitcoin ETFs as early as January, which could make investing in crypto more accessible to investors, Yiannis Giokas, a senior product director at Moody's, told CBS MoneyWatch.
"As more and more managers venture into the bitcoin spot ETF space, more retail and institutional investors, even the more conservative ones, will feel a higher degree of comfort investing in this space," he said.
Bitcoin prices are also benefiting from a growing conviction on Wall Street that the Federal Reserve is done hiking its benchmark interest rate now that inflation is receding and that the central bank could even start loosening monetary policy by mid-2024 to keep the economy on track.
When interest rates fall, investors are more likely to pour money into riskier assets such as crypto.
"Lower rates are bullish for bitcoin," Greg Magadini, director of derivatives at crypto data firm Amberdata, told CBS MoneyWatch.
Giokas thinks 2024 could be a banner year for bitcoin, a proxy for how well the crypto market as a whole is doing.
Bitcoin "hit $40,000 for the first time in 2021, and every time it was followed by a bull run, so it's a logical expectation from the markets that another run is on its way," he said.
— The Associated Press contributed reporting.
