NerdWallet's Smart Money Podcast - Crypto Makes Another Comeback: What's Different This Time?

Episode Date: March 13, 2024

Understand the recent resurgence of cryptocurrency prices and what the future may have in store for crypto investments. Why did Bitcoin’s price go back up? Why are cryptocurrencies controversial? Hosts Sean Pyles and Anna Helhoski delve into the recent resurgence of cryptocurrency, particularly Bitcoin, after its dramatic fall in previous years. They discuss the factors behind Bitcoin's recent rally, including the upcoming blockchain reward halving and the approval of spot Bitcoin ETFs, shedding light on what this means for investors. NerdWallet investing writer Sam Taube joins the discussion to provide insights into the divisive nature of cryptocurrency, its use as an alternative investment, and the controversies surrounding aspects like mining and environmental impact. In their conversation, the Nerds discuss: bitcoin ETFs, blockchain, digital currencies, ethereum ETFs, crypto investing, cryptocurrency investments, personal finance, cryptocurrency market, bitcoin prices, cryptocurrency trading, cryptocurrency mining, cryptocurrency volatility, DeFi, cryptocurrency regulation, cryptocurrency adoption, and decentralized finance. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Listeners, you may remember a couple of years ago when cryptocurrency like Bitcoin was all the rage.

Back in those salad days, Bitcoin's price was surging. Celebrities like Matt Damon and Lindsay Lohan were shilling crypto in Super Bowl ads, and Sam Bankman-Fried's crypto exchange made him the newest billionaire on the street. But that bubble burst big time when the Federal Reserve began raising interest rates. Crypto effectively collapsed.

Bitcoin's price dropped, celebrities clammed up, and crypto wonderkid Sam Bankman-Fried is now in jail awaiting fraud-related sentencing. From the outside, it looked like crypto had simply been a fad until the price of Bitcoin started to creep back up in late 2023. In the last few weeks, Bitcoin has seriously rallied. That's right. And earlier this week, the cryptocurrency reached a new all-time high price of more than $70,000 in the market. That's right. And earlier this week, the cryptocurrency reached a new all-time high price of more than $70,000 in the market. That's up from just over $42,000 at the start of the year. Today, we have NerdWallet investing writer Sam Taub here to explain Bitcoin's comeback in the market and what happens next.

Sam Taub, welcome back to Money News. Thanks. I'm back and so is Bitcoin, apparently. Yeah. Well, Sam, let's back up and give a little Crypto 101. Very briefly, what is cryptocurrency and how can people use it? Cryptocurrencies like Bitcoin are digital currencies whose value is totally unrelated to any other kind of currency or financial asset. But they actually have limited use as payment methods. So what do people use them for instead? Well, they're mostly popular as an alternative investment.

Cryptocurrencies live in self-maintained, tamper-proof online databases called blockchains, and a big part of their appeal is the independence of those blockchains from any kind of authority. Conventional currencies like the dollar are given value by government. Conventional investments like stocks are given value by an underlying company. But cryptocurrencies exist outside of the scope of those things and have value in and of themselves. Okay, so would it be appropriate to compare cryptocurrencies to precious metals like gold and silver?

That's a good analogy. Much like with gold, some investors buy a little bit of it for the sake of diversification. But others kind of stockpile these things, whether we're talking about gold or cryptocurrency, because they distrust the conventional financial system or because they think some big news event is going to cause the price of these things to spike. Even before the crypto bubble burst back in 2022, Sam, it was pretty divisive. Why do people love it or hate it? Oh boy, if I really dig into this question, we could be here for an hour, but I'll try to give just the highlights. As I mentioned, a big appeal of cryptocurrency is its independence from any kind of authority. It's popular among people who don't trust

the conventional financial system or don't approve of the government's handling of the economy. But here's the other side of that. Since cryptocurrencies exist outside the purview of government regulation, they're also very popular among people who are doing nefarious things with money like drug smuggling or money laundering or

sanctions evasion. Now, what about cryptocurrency mining? That seems like another controversial aspect of crypto. It sure is. You can mine cryptocurrencies like Bitcoin, that is, produce new Bitcoins out of nothing, by having computers solve complicated math problems that help keep the Bitcoin blockchain updated and safe. Now, on the one hand, this means that if you have cheap electricity, an internet connection, and some computer hardware, you can just passively make money mining Bitcoin, which is kind of neat. But on the other hand, Bitcoin mining uses a wild amount of electricity. And as Bitcoin has gotten popular, the carbon footprint of all those mining computers has really ramped up.

Yeah, a few years back, Cambridge University found that Bitcoin used more energy than the entire country of Argentina. But it seemed at the time that Bitcoin and other cryptocurrencies were so promising. So what happened? Why did they fall? Well, crypto bull markets tend to be driven by positive hype. And we'll talk more about how that hype works in a moment, I think. But they often get tipped into bear markets by negative news, and that definitely played a role in the 2022 crash. The collapse of FTX, which you mentioned, really put a damper on things a couple of years ago. It was this big catastrophe where upwards of a million people lost access to their money, which had been criminally mismanaged by this exchange.

And that brought a lot of scrutiny to other major crypto exchanges, like Binance, for example. And it created a perception that regulators are kind of looking for blood in the crypto space. So that scared away some people. It seemed like Bitcoin's rally came out of nowhere. But is that just an outsider's perspective, Sam? What's behind this surge? Well, there are a couple of things behind the recent surge. One thing that has been pushing up prices is the upcoming blockchain reward halving, which is expected in April. We talked earlier about Bitcoin mining. Another aspect of it is there's a self-regulating feature of the Bitcoin protocol where every few years the payoff from mining, the amount of

Bitcoin you can earn per calculation, gets cut in half. This is kind of a mechanism that keeps the supply of Bitcoin relatively stable. When one of those halving events happens, investors often see it as an upcoming constraint to the supply of Bitcoin. And in line with supply and demand, that means prices go up. We've seen major Bitcoin rallies in the months around every previous halving event, and this one seems to be no different. The other thing that has given some tailwinds to Bitcoin this year is the approval of spot Bitcoin ETFs. Before those funds came online,

there was really no direct way to invest in Bitcoin through like a 401k. Now people are excited by the prospect of a lot of retirement account money coming into crypto markets. So what does this mean for the trading volume of other cryptocurrencies? Are they likely to follow Bitcoin's trajectory? Like, for example, the one crypto that I own, the meme coin Dogecoin has shot up in value to a whopping 17 cents as of this recording. Can I expect this incredible rally to continue? Well, first of all, congratulations. Thank you. But, you know, I really can't answer that question with any certainty. A lot of the small cryptocurrencies like Dogecoin, they're really just casinos. They might directionally move with Bitcoin, but the

amount of volatility they have makes it really impossible to have any kind of certainty about what you're doing. So we'll have to see when it comes to the smaller cryptocurrencies. There is one other cryptocurrency that has some similar tailwinds as Bitcoin, though. We talked earlier about how the approval of spot Bitcoin ETFs was a big deal for Bitcoin. And there's a widespread belief nowadays that the Securities and Exchange Commission is getting ready to approve spot Ethereum ETFs in the near future. And that could create some similar hype for Ethereum. But for now, that's not a sure thing. It's kind of just a plausible rumor. So, Sam, what should crypto curious investors know? Do you think this is just another blip, another bubble, or does it prove that in the long run,

crypto might not be such a shaky investment? Well, you know, we can't predict the future, but we can look at the past. Crypto has been going through these cycles of boom and bust ever since its inception. And every boom cycle, its fans say the price is going to the moon. And every bear cycle, its detractors say that the whole thing is a fraud and it's all going to zero. But neither of those things have happened yet in crypto's 15-ish years of existence. And it's worth considering the possibility that crypto might just bounce up and down between bull markets and bear markets forever.

And another thing to consider is that the current bull market briefly touched a new all-time high for Bitcoin, as you said, over $70,000. And the 2021 and 2017 bull markets both created new all-time highs as well. So crypto fans aren't necessarily wrong when they say that crypto in the long run has gone up over time and may continue to do so. The question is whether you're willing to put up with the wild volatility of crypto markets while you're waiting for that next high. Sam, thanks for sharing your insights. Of course. Thanks for having me on. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us with your questions questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast.

Today's episode was produced by Sean and I. It was edited by Rick Vanderkneife. Sarah Brink mixed our audio. Here's our brief disclaimer. We are not financial or investment or crypto advisors. This nerdy info is provided for general educational and entertainment purposes And with that said, until next time, turn to the nerds.