Another Bitcoin Article | ETF Trends

Author: Veronica A. Fulton, CFA

Bitcoin is once again populating headlines across financial news. After making a new all-time high on March 14, the crypto has cooled down but is still up nearly 60% year-to-date. The upside can be attributable to primarily two things: the SEC’s ruling, and Bitcoin’s halving cycle. Starting with the former, on January 10th, 2024, the SEC approved the listing and trading of spot Bitcoin ETFs. Prior to this, US investors could only gain exposure to Bitcoin through derivative products such as futures contracts, the Grayscale Bitcoin Trust (GBTC), or holding the actual cryptocurrency outright, which comes with its own challenges. Now investors may gain exposure to Bitcoin’s price movement without the inconvenience of buying and selling crypto directly, removing a barrier to entry while providing some degree of regulatory oversight.

The integration of cryptocurrency into traditional markets has been widely anticipated by Bitcoin bulls for some time. So, unsurprisingly, the approval was met with massive inflows into the ETFs. Within the first day, trading volume was $4.6bn. After the first seven days of trading, the combined products saw $20 billion in trading volume. We’ve even begun to see some broker dealers approve the ETFs for advisors to use with clients. This all seemingly supports the narrative that there’s “pent-up demand” for Bitcoin, possibly from institutional investors. However, there are some broker-dealers who have restricted the ETFs for adviser use and understand that the SEC’s approval does not make it a “safe” investment nor a store of value. We agree with this. Bitcoin is highly speculative in nature and most of its value rests on it being a scarce asset as opposed to it having a true fundamental use case.

Which brings me to the latter – bitcoin’s halving cycle. Some analysts believe Bitcoin will be worth $150,000 in 2025, and going out further in time some targets are as high as $1,000,000. With bitcoin trading around $67,000 now, these are aggressive price targets, so understanding how they’re derived is essential. Some analysts are using returns and volatility data from Bitcoin’s last 3 halving cycles and predicting that similar patterns will recur in the future. That’s all.

For clarity, there’s a finite number of bitcoins – 21 million. Every 4 years the number of bitcoins that are mined is cut in half, that 4-year time span is considered a cycle. The first halving occurred in 2012, then again in both 2016 and 2020, with the next halving set to occur in April 2024. All Bitcoin will be mined by the year 2140. Halving events are designed to reduce the rate at which new bitcoins are created, thus slowing down the overall supply of bitcoin. Bitcoin bulls believe the reduced supply will lead to an increase in the price of Bitcoin, due to the basic economic principle of supply and demand. But why, as investors, should we be confident that demand for Bitcoin will be there? What are the drivers?

After 14+ years of circulation, there still has not been a widespread adoption of cryptocurrency to transact. Additionally, out of those transactions, Bitcoin accounts for less than 10%. This is primarily due to its high volatility, making currency conversion a risk to merchants. Stablecoins are the preference for transactions using cryptocurrencies as they’re designed to track hard currencies, making the prices more stable.  We’re also able to easily exchange payments electronically via Visa and Mastercard etc., so there’s not a clear incentive to uproot and change the entire way we do commerce. Bulls expected that its popularity among the younger generation would allow Bitcoin to become the new “digital gold”. That still remains to be seen. To diversify away from the dollar, central banks worldwide are buying gold, not bitcoin, at a record pace. We understand that price trends favor the bulls, however, the fundamental case for demand has yet to be proven, drawing a line in the sand between those who speculate and those who invest.

Sources: Axios, Market Watch, Techopedia, The Block, The Financial Times

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