Unlocking the Potential: A Deep Dive into Bitcoin and the Impact of Bitcoin ETFs 

February 15th, 2024 by Sound Planning Group

David Stryzewski talks Bitcoinn Halving

What is Bitcoin?

Bitcoin, the first decentralized digital currency, revolutionized the financial landscape when it was introduced in January 2009. Its inception marked the beginning of an era where transactions could be made peer-to-peer without the need for a central authority, a concept that has since spurred a global fascination with cryptocurrencies.

Fast forward to today and we’ve witnessed a monumental validation for Bitcoin where the SEC has approved a Bitcoin futures ETF, allowing investors to gain exposure to Bitcoin without directly owning the asset. This development is not just an endorsement of Bitcoin’s legitimacy as an investment vehicle, but it paves the way for broader institutional adoption, representing a major leap forward for cryptocurrency market maturity.

To understand the importance of these ETFs, you should understand what Bitcoin is and how it’s mined.

What is Bitcoin Mining?

Bitcoin mining validates the information in a blockchain generated by the solution of complex mathematical problems. The amount of Bitcoin earned changes over time. This reward serves as a potent incentive for miners to continue their work.

Bitcoin is stored in digital wallets—a sophisticated piece of software that allows you to securely send, receive, and manage your cryptocurrency holdings. Think of these wallets like a digital bank account, but with a twist: you’re in full control. Unlike traditional banks, there is no ‘Forgot your password?’ link or customer service hotline to recover your funds if things go awry. If your private key is lost or stolen, say goodbye to your digital asset. All investments come with risk, but Bitcoin traditionally has been viewed to be very risky for this reason.

Limitations of Bitcoin Mining for the Average Person

It’s natural to hear about the potential lucrative rewards of Bitcoin mining and think, “Why can’t I just start mining Bitcoin myself?”

The reality, however, is far more complex. Bitcoin mining is not just about solving puzzles; it’s a full-fledged industry that requires substantial investments in specialized hardware known as ASIC (Application-Specific Integrated Circuit) miners, which are costly and consume enormous amounts of electricity.

Fast fact: It would take nine years of household-equivalent electricity to mine a single bitcoin as of August 2021.

Moreover, the difficulty of mining Bitcoin automatically adjusts approximately every two weeks to maintain a consistent rate of new coin creation as more miners join the network. This means that as time progresses, the puzzles become increasingly difficult, necessitating more powerful (and more expensive) hardware to remain competitive.

Your average computer or DIY mining rig simply won’t cut it in this high-stakes environment—doing so would be akin to bringing a knife to a gunfight. To be a successful miner today, you need to have deep pockets and access to the right technology.

So, for most people, the dream of mining Bitcoin is just that—a dream, unless you’re prepared to make a significant investment and potentially face the volatility and uncertainties of the market.

Why is a Bitcoin ETF a big deal?

The advent of a Bitcoin ETF is electrifying news for investors for several reasons.

This new availability allows investors to purchase shares representative of Bitcoin itself, without the technical complexity of managing a digital wallet or the security concerns of holding the cryptocurrency directly. A Bitcoin ETF is thought to be a convenient, traditional investment vehicle that breaks down barriers to entry and opens the floodgates of mainstream investment portfolios to the world of cryptocurrencies.

There’s a huge impact now that there is regulatory oversight by the SEC. Investors gain peace of mind knowing the offering adheres to established financial regulations, adding a layer of security and legitimacy.

For many investors, a Bitcoin ETF creates a new opportunity for diversification. Historically, Bitcoin hasn’t correlated directly with the stock market which translates to higher or unknown risk. A Bitcoin ETF could be integrated into a portfolio at a potentially lower overall investment risk than outright owning Bitcoin.

What is Bitcoin Halving and why is it important?

As Bitcoin is mined, there is a process called Halving that is designed to help control the rate and potentially the value of Bitcoin on the market. For every 210,000 blocks that are mined—approximately every four years—this reward is halved. This process is baked right into Bitcoin’s protocol. Halving is crucial because it controls the rate at which new Bitcoin is introduced into the market, affecting Bitcoin’s supply and, potentially, its price.

Bitcoin Halving is a double-edged sword. On one hand, halvings can create a kind of scarcity, potentially driving up demand and Bitcoin’s price. We’ve seen it happen in the past. After each previous halving, there has been a significant increase in Bitcoin’s price.

On the other hand, halving reduces the reward that miners receive for their effort. If the price of Bitcoin doesn’t increase to balance out the reduced reward, miners might find it unprofitable to keep mining, reducing the network’s security.

This may impact the new Bitcoin ETFs as this scarcity has made ETFs a more attractive investment option as it potentially offers higher returns.

Overall, while the impact of bitcoin halving on new ETFs is still unfolding, it is clear that this event has played a significant role in driving interest and growth in these financial products related to bitcoin.

The next Bitcoin Halving is slated for 2024, and it’s anyone’s guess what will happen—will it follow past patterns and trigger a price surge, or will the diminished miners’ reward impact its intrinsic value adversely?

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice.  Consult with your investment advisor, legal, non-financial planning tax specialist, or estate professional prior to making any financial decisions for your personal situation. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by SPGA), will be profitable or equal to any historical performance level(s). Our advisors can meet with you to discuss your retirement plan. We’re here to help with all of these things and more.

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