Bitcoin Slump Could Lead to Rally, Says Research Firm

Bitcoin, the largest cryptocurrency by market value, is mired in a slump. The decision in the Greyscale case stoked optimism that the SEC will eventually, finally approve spot bitcoin ETFs. Still, the bitcoin slump has erased all of the upside generated by the court ruling.

As of late Sept. 12, bitcoin sported a modest one-week gain, but barely enough to dent recent losses. However, some market observers believe that’s merely a matter of time before bitcoin regains its bullish ways. They also believe that solid fundamentals will ground the rebound, when it does materialize.

In a recent note to clients, Bernstein observed that recent legal rulings, including an appellate court siding with Grayscale against the SEC, are catalysts for bitcoin. When a resurgence occurs, it’s likely to be led by institutional buyers, not small-time retail investors.

“The strong showing in the courts (Ripple and Grayscale in two months), improved ETF chances and the progressive institutional interest are positioning crypto for an unprecedented institution capital led cycle, unlike the retail led crypto cycles of the past,”  wrote Bernstein’s Gautam Chhugani. “This is a cycle slower to take off, but is being laid on much stronger fundamental grounds of regulatory clarity and more strategic long-term players entering the space.”

Other Bitcoin Factors to Consider

While there was ample enthusiasm for bitcoin and other digital currencies immediately following the Grayscale ruling, it essentially became a “sell the news” event because the ruling, while positive, isn’t a guarantee of long-awaited spot bitcoin ETFs coming to market.

For the moment, the prospects of a spot bitcoin ETF coming to market in the U.S. still appear murky. Still, Chhugani believes it’s just a matter of time. When it finally happens, the floodgates will open. It’s a compelling asset class with which fund issuers can generate fees.

“Thus, we believe, the crypto industry will get its first Bitcoin ETF between mid October and mid March 2024 (the scheduled review dates),” added the analyst.

He noted a spot bitcoin ETF is a major opportunity for fund issuers to “to generate fees (at healthy rates 50-75 bps) for a growing asset class.” At the mid-point of that range, 0.65% per year, that’s well above the average annual fee on ETFs. It’s far in excess of the fees levied by pure beta equity and fixed income strategies.

A spot bitcoin ETF could fuel rallies in other digital assets. ETF sponsors are already filing for products tied to other cryptocurrencies.

““The industry push for Ethereum spot ETF follows immediately after, given ETH also has a similar market structure of a traded CME futures market (>2 years) and a spot market,” concludes the Bernstein analyst. “In fact, the asset management industry would push beyond BTC, ETH into areas [such as]top blockchains (Solana, Polygon etc) and even extend into segments such as leading DeFi assets.”

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