Bitcoin is back. Again. Nothing new in that, you might say. The price goes up, it goes down. Often at speed.
Except this time, maybe there is something new because the world’s number one cryptocurrency looks set to attract a new source of demand and investors are buying now before the price takes off as a result.
Given all the gloom out there, it seems strange that the world’s frothiest asset class should suddenly bubble up just as everything else is falling.
So, is there something in it, or is this a distraction that investors could do without?
The US technology revival has generated most of the excitement in this volatile year, as investors look for ways to monetise the artificial intelligence revolution.
Yet, while investors fixated on runaway stocks like chip maker Nvidia, many have overlooked Bitcoin’s quiet resurgence.
Its price is up 105.41 per cent year to date and while that trails Nvidia’s blockbuster 181.7 per cent return, it’s still impressive.
Bitcoin opened the year trading at about $16,605 and spent the summer bobbing around the $25,000 mark.
Then it suddenly rocketed to an 18-month high of $35,000 on reports that US regulators are set to approve the first spot Bitcoin exchange-traded fund (ETF).
A “physical” Bitcoin ETF would allow both private and institutional investors to track the Bitcoin price without the risk and trouble of actually buying it, making it much easier to pop into their portfolios and retirement plans.
Even if they do not like, trust or understand Bitcoin, they can still have exposure to it for diversification purposes, just as they may hold some gold, commodities, cash or any other asset class.
Speculators piled into Bitcoin, while André Dragosch from Deutsche Digital Assets also pinned the price surge on a “short squeeze” as investors betting that the price would fall rushed to close their positions.
He also warned of a potential price correction in the short term, which would surprise precisely nobody.
The US Securities and Exchange Commission appears to have fought a losing battle against allowing ETFs to invest directly in Bitcoin, citing risks such as fraud and market manipulation.
While the SEC has greenlighted ETFs holding Bitcoin and Ethereum futures, it has been on its guard following the collapse of crypto exchange FTX, whose co-founder Sam Bankman-Fried is now on trial for fraud.
In August, the District of Columbia Court of Appeals in Washington ruled that the SEC was wrong to reject a proposal by Grayscale Investments to launch a spot Bitcoin ETF, and formalised its decision on October 24. The SEC is not expected to appeal.
Some of the world’s biggest asset managers are now lining up to muscle into the new sector, says Vijay Valecha, chief investment officer at Century Financial.
BlackRock, which runs the iShares ETF range, and Fidelity and Invesco have been watching the SEC case closely.
In fact, BlackRock has listed its IBTC ticker on the Depository Trust and Clearing Corporation website, an essential precursor to listing a new ETF.
Long-term Bitcoin bull Cathie Wood at ARK Invest has been creating a Bitcoin ETF in partnership with 21Shares.
While Bitcoin has retreated since hitting $35,000, Mr Valecha says that if Bitcoin bulls keep the momentum going, the next hurdles align at $36,507 and further at $38,579.
Alternatively, it could just as easily crash through its $31,212 support level.
It’s quite the comeback for Bitcoin, but the price still remains well below its all-time high of around $66,000, which it hit in November 2021.
That turned out to be the high water mark for risk assets, just before inflation and interest rates rocketed and Russia invaded Ukraine.
The crypto winter was long and hard, and some suspected investors had lost interest in Bitcoin altogether, as the new era of higher borrowing costs and lower growth spooked speculators and the get-rich-quick crew drifted away.
Inflated claims that Bitcoin was “digital gold” also looked overblown, as its price crashed along with shares and bonds in 2022. Rather than a store of value, it was beginning to look like a destructor of wealth.
Crypto does have one clear corollary with gold, though. Neither pay any income, which makes them look less attractive at a time when investors can get positive yields from bonds and cash.
That hasn’t stopped Bitcoin lately as the price and liquidity recovers, but Justin d’Anethan, head of Asia-Pacific business development at crypto market maker Keyrock, reminds investors that the recent surge is “still nothing compared to the euphoria of 2020-2021”.
That could now change as Bitcoin lives and dies on market sentiment. After a long summer lull, optimism and volatility have returned to crypto markets, says Matthew Weller, global head of research at City Index and Forex.com.
“Only a break back below $32,000 would erase the near-term bullish bias at this point,” he adds.
Unlike futures-based products such as CME Group’s Bitcoin futures contract, physical spot ETFs will “fundamentally alter the supply/demand balance in a bullish way”, Mr Weller says, as funds would have to buy and hold Bitcoin equal to the assets under management.
Bitcoin has retreated slightly in recent days in a case of “buy the rumour, sell the fact”, but Mr Weller says the price enjoys two other “big picture tailwinds”.
First, history suggests it should be entering a bullish period as we approach the next “halving” in April 2024.
This is where the reward for mining new blocks is halved, meaning miners receive 50 per cent fewer Bitcoins for verifying transactions.
They occur roughly every four years and have tended to push prices higher by reducing the supply of new Bitcoins being generated by the network.
The second big tailwind is the long-awaited approach of peak interest rates, with signs that central banks like the US Federal Reserve are done with the hikes.
So that’s three big tailwinds for Bitcoin, Mr Weller says.
“The next big psychological event is $40,000,” he adds.
Will Bitcoin get there? Probably, at some point, but investors must still remember that this is a highly speculative asset, and they should only gamble a small part of their portfolio. Or maybe wait for that ETF.
Updated: November 01, 2023, 5:00 AM