Will Bitcoin Crash in 2025?

Over the long term, the cryptocurrency industry has steadily accumulated value, but it has been a wild ride. With the prices of Bitcoin (CRYPTO: BTC) already down by 22% from their all-time high of $109,358 (reached on Trump's inauguration day, Jan. 20), buying these assets at the wrong time could expose your portfolio to tremendous volatility.

Let's explore what the rest of the year might have in store.

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The Trump trade

Bitcoin's latest rally is demonstrably linked to the Trump Administration. Despite falling sharply from all-time highs, prices for the digital currency are still up by more than double since President Trump's election victory on Nov. 5. This price movement reflects the market's optimism that the new administration will take a more positive stance toward the industry in contrast to the stricter regulatory approach favored in previous years.

Bitcoin Price data by YCharts.

So far, the optimism looks justified. Under its acting director Mark Uyeda, the Securities and Exchange Commission is prioritizing regulatory clarity over enforcement, creating a Crypto Task Force to help investors and developers better understand the rules of the game.

The regulatory body has also dropped a series of lawsuits against crypto exchanges like Coinbase, Consensys, and Kraken, mainly related to whether or not cryptocurrencies should be classified as securities.

Regulatory clarity will be key to Bitcoin's acceptance by mainstream financial institutions like mutual funds, pension funds, and even insurance companies. These organizations are typically seen as smart money, which can boost the asset's legitimacy. They also tend to invest vast amounts of money for the long haul, which can reduce volatility and make Bitcoin's price more stable.

Recession fears are a significant headwind

While Bitcoin enjoys long-term tailwinds with the new administration, challenges could emerge in 2025.

Economists at J.P. Morgan (part of JPMorgan Chase) forecast a 40% chance of recession due in part to Trump's tariff policy, which could spark a trade war between the U.S. and its biggest trading partners. A slew of consumer goods retailers like Dollar General and Walmart have also flagged deteriorating consumer sentiment, which is a bad sign for the economy. That said, it is unclear how a downturn would affect Bitcoin.

Unlike a corporate stock, Bitcoin isn't valued based on revenue or earnings growth, so a recession wouldn't actually affect its intrinsic value. In that sense, it's more like a currency. However, recessions tend to reduce asset prices in general, which sucks wealth out of the economy.

Image source: Getty Images.

If people and organizations have less wealth, they will be less willing to speculate on risky assets like cryptocurrency. And cash-strapped retail investors may be tempted to sell their holdings in the event of job losses or other real-life emergencies.

During the brief COVID-19 recession, Bitcoin and other cryptocurrencies experienced massive drops in their value before recovering sharply with government stimulus. And investors can expect a similar scenario to play out in future downturns.

It's hard to time the market

For most investors, holding for the long haul is a better strategy than trying to time the market -- even with volatile cryptocurrencies. With that being said, Bitcoin seems to be at the top of a bull cycle, and challenges like a potential recession increases significant downside risk over the next few months.

While a favorable regulatory climate could unlock long-term gains, investors may want to wait for the dust to settle before considering a position.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, JPMorgan Chase, and Walmart. The Motley Fool has a disclosure policy.