Bitcoin Reaches $25,000, Is the Worst Over For Crypto?

Bitcoin finally broke the $25,000 barrier last night, erasing some of its recent losses. According to CoinMarketCap data, it briefly peaked at $25,135, a level we haven't seen since mid-June. Bitcoin closed yesterday about 20% up on the month before, causing some analysts to hope the worst might be over for the crypto industry.

What's behind Bitcoin's recent gains?

There are a few drivers for Bitcoin's recent price increases. Market sentiment -- a key factor in crypto markets -- hasn't been this optimistic since April. For months the crypto fear and greed index has languished somewhere between "fear" and "extreme fear." Yesterday it moved into "neutral" territory, reflecting a tentative sense of optimism.

It also seems as if the worst of the decentralized finance crashes could be behind us. After Terra's collapse in May, the contagion spread to several other crypto lending platforms including Celsius, which further unsettled the crypto markets. Without being overly optimistic, if the aftershocks following Terra's fall are over, the industry can start to rebuild user trust.

There's more and more correlation between crypto prices and global equities, particularly tech stocks. Equities rose last week on news that inflation had fallen slightly, sparking hopes that we may have turned a corner. Strong jobs data and positive company earnings reports added to investor optimism.

Is the worst over for crypto?

Breaking $25,000 is positive news, but Bitcoin has a long way to go before it reclaims last year's highs of over $68,000. It's also worth noting that Bitcoin couldn't hold above $25,000 -- it's currently trading at around $24,000. We need to see Bitcoin hold above $25,000 or even higher before we can start talking about a recovery.

There are a number of factors that could halt this tentative rebound in prices. Here are some issues to watch:

• The global energy crisis: Russia's invasion of Ukraine created a global energy crisis, pushing up prices in Europe, the U.S., and many other countries. With winter looming and no sign of an end to the conflict, this crisis is far from over.
• Inflation rates: Inflation has dropped slightly, but it continues to be high. Plus, if energy prices increase further in the coming months, there may be a corresponding increase in the cost of living. As we'll touch on in the next point, high inflation can trigger harsh action from the Fed, which has a knock-on effect on crypto.
• Federal Reserve activity: The Federal Reserve's efforts to tackle inflation have played a big part in decreasing crypto prices this year. Tightening economic policies have caused investors to pull away from riskier assets like crypto. All eyes will be on the next Fed meeting in September to see if it introduces another jumbo rate hike.
• Regulation: Increased crypto regulation is inevitable, but we still don't know what shape it will take -- particularly in the U.S. Heavy regulation could have a strong impact on crypto prices in the short and medium term.
• Ethereum merge: The long awaited Ethereum merge is due in mid-September, and will probably be the most important thing to happen in the crypto industry this year. Anticipation around the merge continues to push ETH's price up and generate positive momentum for the wider market. However, technical issues or further delays could reverse that sentiment.

Still plenty of reasons for caution

If you're considering buying crypto in the coming weeks, tread carefully. Make sure you understand the risks involved and only invest money you can afford to lose. Bitcoin and other cryptocurrencies are still volatile assets and there's a lot we don't know about how the market will develop.

It's extremely unlikely that Bitcoin will suddenly rally back to over $68,000 in the near future. So take your time, consider how crypto fits into your wider investment portfolio and cover your other financial bases -- such as your retirement savings and emergency fund -- before you buy Bitcoin or any other crypto.

This article originally appeared in The Motley Fool.

Emma Newbery has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.