01/16/2024 0 Comments

1. Bitcoin ETFs Are Finally Here, Crypto Investing Will Never Be The Same

When regulators finally opened the starting gates for spot bitcoin ETFs to trade, existing funds that converted to the new model surged, new funds racked up trading volume and bitcoin prices bolted higher. Then, by the end of the first trading Thursday, most of the funds lost ground.

An anticlimactic start? In some ways, maybe. But make no mistake; the new bitcoin ETFs mark a clear step forward for the still young digital currencies.

The Securities and Exchange Commission officially approved 11 spot bitcoin ETFs for trading late Wednesday. Trading kicked off early Thursday on the NYSE, Nasdaq and Chicago Board Options Exchange. The funds, all spot bitcoin ETFs, directly purchase and hold bitcoin assets.

In contrast, ProShares Bitcoin Strategy (BITO), the first U.S. bitcoin-linked ETF, which launched in 2021, invests in bitcoin futures contracts.

The new spot bitcoin funds are expected to increase direct demand for bitcoin and lure institutions and other new investor classes into cryptocurrencies and other digital assets.

“We are at the beginning of the first-ever institutional bull market in crypto — and spot ETF momentum is a key part of the momentum,” said Diogo Monica, president and co-founder of Anchorage Digital. Anchorage helps institutions buy, store and manage digital assets.

Crypto enthusiasts like Monica tout spot bitcoin ETFs as a major tailwind for digital assets in 2024. That seems to be the consensus, but investors will be anxiously watching to see how bitcoin prices play out.

Analysts say bitcoin may have been overbought ahead of the ETF launch, predicting regulatory approval could become a “sell-the-news” type event, at least in the short run.

Bitcoin spiked to 20-month highs above $45,000 to start 2024 and briefly reached $49,000 on Thursday. That was its highest level since December 2021. It then quickly erased its ETF-fueled gains.

Marathon Digital (MARA), CoinDesk (COIN), Riot Platforms (RIOT) and other crypto-related stocks have skyrocketed in recent months. But they pulled away from highs since the start of January and continued retreating as bitcoin eased.

SEC Finally Approves Bitcoin ETFs

The SEC’s approval list on Wednesday included ETFs from ARK Invest (ARKK), BlackRock (BLK), VanEck, WisdomTree, Fidelity, Invesco, Franklin Templeton, Bitwise and Valkyrie.

Grayscale Investments received approval to convert its $28 billion bitcoin trust into the Grayscale Bitcoin (GBTC) spot ETF. Meanwhile, Hashdex, in coordination with Tidal Investments, was approved to convert its Hashdex Bitcoin Futures ETF (DEFI) into a spot bitcoin fund.

Grayscale traded down 6% to near 38 and Hashdex was more than 12% lower, just above 52, at midday Friday.

Issuers ARK Invest and collaborator 21Shares, Fidelity, Franklin Templeton, VanEck, WisdomTree, and Invesco with partner Galaxy Digital listed their six bitcoin ETFs on the Chicago Board Options Exchange. BlackRock iShares Bitcoin Trust and Valkyrie’s Valkyrie Bitcoin Fund will trade on the Nasdaq. Bitwise joined Hashdex and Grayscale Investments on the NYSE Arca.

The issuers disclosed their planned fees for the ETFs in their updated regulatory filings on Jan. 9 and 10. The fees range from 0.2% to 1.5%, excluding waivers.

Charles Schwab (SCHW) announced early Thursday that ETFs were available on its platform, a public-relations rep told IBD. But some brokers, including Vanguard and Merrill Lynch, have so far opted against offering bitcoin ETFs, the Wall Street Journal reported.

2. How Bitcoin ETFs Will Drive Institutional Demand

“A spot bitcoin ETF would streamline exposure for traditional players who have been slower to enter the ecosystem, allowing trillions in institutional capital to come off the sidelines,” Anchorage Digital’s Monica said. “We expect to see major institutions — including hedge funds, sovereign wealth funds and registered investment advisors — drive ETF inflows.”

Anchorage Digital operates a crypto platform for institutions and is valued at over $3 billion. It boasts backing from heavyweight investors like KKR & Co. and Goldman Sachs (GS). Clients span venture capital firms, registered investment advisors, asset managers and crypto protocols, including Apollo Protocol and Visa (V).

Data indicates the demand increase has already started, according to derivatives exchange Deribit. Chief Commercial Officer Luuk Strijers told The Block, a crypto news site, that there’s been a “noticeable uptick in institutional activity” since late October. A 2022 Nasdaq survey of 500 financial advisors found 72% of firms would be more likely to invest client assets in crypto if spot ETF products were offered in the U.S.

Will the Next Bitcoin Halving Be Another Hype Cycle?

The top three bitcoin ETFs have seen well over half a billion dollars worth of capital inflows (not counting Grayscale’s $22 billion fund, which was converted over from the existing GBTC trust and has seen sizable outflows), signifying the significant customer demand for traditional on-ramps into bitcoin (BTC). In the weeks leading up to the date of approval, Wednesday, Jan. 10, bitcoin rallied to a recent high of ~$48,000.

Many analysts and traders are now hoping the upcoming bitcoin halving — when the rate of new bitcoins issued to network validators (aka miners) is slashed — could be a similar catalyst for crypto prices. There is a longstanding debate whether these programmatically triggered events that occur once every four years are “priced in.”

The approval of bitcoin ETF’s last week may give some indication of what’s to come for the next bitcoin hype cycle. The listing of 11 new bitcoin funds was a clear moment to sell, at least in hindsight, and bitcoin has since sagged ~12% to $42,250 today. It remains too early to say whether bitcoin ETFs will draw in billions of new dollars and investors, a prediction that hangs on actual demand for bitcoin.

Meanwhile, the bitcoin halving (sometimes halvening) narrative is a supply-side story: bitcoin’s price could pop after the supply of new coins entering the market becomes constrained, assuming use of the Bitcoin network remains steady or increases.

To some extent, the bitcoin halving narrative is a post-hoc rationalization for the fact that bitcoin has in fact gone on a tear in the months after every halving so far. For instance, six months after the network’s second halving in 2016 (when the emissions of new coins per block fell from 25 to 12.5 BTC), bitcoin crossed the $1,000 threshold for the first time. A similar rally happened in 2020, when bitcoin set a new all-time high.

But there’s little to suggest that these price increases are directly related to the halving, outside of the increased bullish sentiment and media coverage that typically precedes the event. CoinShares, in its latest “Mining Report” noted that there’s a “peak in hashrate growth often occurs about four months before the halving, likely due to a ‘Bitcoin rush,’” which could represent positive sentiment.

Except the economic logic around a bitcoin supply shock is a bit shaky, considering that the supply of new bitcoins will actually continue to increase for the next century or so, at which point all 21 million bitcoins will have been mined. Satoshi Nakamoto designed the Bitcoin network to subsidize miners through these rewards to stimulate adoption, hoping that over time transaction fees will grow large enough to sustain network security and validation.

CoinShares doesn’t offer a price prediction in its report, which instead makes the case that bitcoin mining will grow more competitive after the halving, knocking out the least efficient miners. While Bitcoin has become 90% more efficient since the last halving, hashrate (which represents the amount of computing power put towards network security) and cost structures have also increased.

In fact, the current bitcoin mining difficulty is at historic highs, with computing power jumping over 100% in 2023. CoinShares predicts this to fall off after the halving with a “miner exodus.” The company also said the “average cost of production per coin” could normalize at just under $38,000 post-halving, given the complicated interrelation between hardware and electricity costs, difficulty levels and the cost structures that determine whether certain miners are making or losing money, which determines how many miners are on the network.

What exactly does this mean for bitcoin price predictions? Well somewhat contradictorily, if bitcoin prices remain above $40,000 it may actually drive miner returns lower. CoinShares doesn’t offer this prediction as such, but given that miners are often the largest sellers of bitcoin, reduced profitability may also create selling pressure from that group.

There are plenty of others who disagree, and see the halving as another potential positive catalyst for bitcoin prices. But it’s important to note that everyone has their own incentives. The only near-guarantee when it comes to the halving is that it’s another moment for hype.

3. The Year Of The Fourth Bitcoin Halving

Bitcoin’s monetary policy

It’s set in Bitcoin’s code that there will only ever be 21M bitcoin. New coins enter circulation through a process known as mining.

Miners – entities that deploy specialized computers known as ASICs – participate in a worldwide competition to find a number. On average, every ten minutes, that number is found, and a miner is rewarded with newly minted bitcoin.

At the moment, the reward that a miner receives for producing a block is 6.25 BTC. In April, that number is set to be cut in half, and miners will then receive 3.125 BTC for every block issued.

This process will repeat until the year 2140 when the last satoshi (the smallest denomination of Bitcoin) is expected to be mined.

Halvings, which ultimately mean the asset becomes less inflationary every four years, tend to precipitate a cascade of effects in the Bitcoin market – affecting everyone from miners to speculators.

Miners prepare

“Bitcoin miners are betting that mining will continue to be profitable,” said Dan Roberts, CEO of Iris Energy, a large-scale Bitcoin miner that has been expanding over the past year.

He noted to The Defiant that firms are lowering their debt burdens, limiting cash expenditures, and securing their balance sheets – all in anticipation of the upcoming halving.

Roberts also said that scale is important and that if a mining firm isn’t growing into and beyond the halving event, it could see its doors shuttered.

That’s a common feature of a halving.

The block reward gets chopped in half, and miners who don’t have the facilities to withstand the drop in revenue – perhaps paying higher prices for electricity than competitors – are likely to shut down operations.

Bitcoin tends to rise during halving years

According to Ecoinometrics, a daily macro chart project, Bitcoin usually witnesses significant upside during its halving years. The project points out, however, that with only three such events under the network’s belt, the data isn’t definitive.

In some cases, the price does suffer after block rewards get reduced in half, only to resume its upward trajectory in the 12-18 months afterward.

The current Bitcoin halving cycle is performing below expectations, wrote Ecoinometrics. This is due to several factors, including the Terra and FTX implosions that took place in late 2022.

The recent approval of spot Bitcoin ETFs in the U.S. could fuel a renewed push higher for the world’s most valuable cryptocurrency. Traders piled into the new instrument, which saw record daily trading volumes upon launching yesterday.

The Bitcoin halving has always precipitated speculation among investors and traders, as the scarcity element built into the network’s monetary policy comes to the forefront.

Whether it will trigger another bull run is anybody’s guess. However, many are betting on the idea that history doesn’t repeat, but it does rhyme.

author avatar
Harvey CHEN

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