- ETF Approval
- Market Overview
- Crypto and TradeFi
- Public Perspective
- The Bitcoin Halving Effect
2024 started on a positive note for the crypto industry with the SEC approving the Bitcoin ETFs. This year is already poised for a more significant upgrade into the ecosystem with Bitcoin halving scheduled for April. The approval of the ETF opens the door for a lot of investors. The new investors can now cash in on the cryptocurrency with a more familiar investment vehicle – the ETF. This is poised to allow for higher liquidity and less volatility of the price of Bitcon. The approval means a growing legitimacy and faith of the financial institutions and the government. These reasons are going to be pivotal in understanding the role of digital assets, in general, for the future.
On 10th January 2024, The SEC approved the first ever Bitcoin spot ETF. In total the SEC approved the 11 spot Bitcoin ETFs and 10 of them started trading the next day. A spot Bitcoin ETF is a highly liquid exchange-traded fund that, like a stock, changes price throughout the trading day. It directly tracks the price of Bitcoin by holding a large amount of the cryptocurrency itself. It is similar to a spot gold ETF, which stores physical gold bullion on behalf of its shareholders. The newly approved Bitcoin ETFs are the first cryptocurrency funds to trade on a major exchange while holding Bitcoin directly.
Most spot Bitcoin ETFs (similar to spot gold ETFs) rely on third-party custodians to store their Bitcoin holdings. Currently, eight out of the 10 trading spot Bitcoin ETFs use Coinbase as their custodian, with exceptions being Fidelity and Gemini for specific funds. The concentration of custodianship with Coinbase raises concerns about custodianship risk. If Coinbase were to face severe financial issues, potential threats like cyberattacks, government penalties, or revenue decline might jeopardize the safety of Bitcoin ETF holdings. While mechanisms exist for ETFs and investors to recover assets in the event of a custodian’s bankruptcy, they may not be instantaneous or automatic This is the reason that the investors should consider custodianship risk when choosing a spot Bitcoin ETF.
The spot ETF market lived up to the hype. The ETFs had traded almost $10 billion total over 3 days. To give some context, if we compare the total of 500 ETFs that were launched in 2023, they booked a total trading volume of $450 million for the whole year.
Within the 15 days of trading the new Bitcoin ETFs have already made the commodities ETFs leaderboard. BlackRock’s iShares Bitcoin ETF and Fidelity WiseOrigin Bitcoin ETF surpassed the leading oil ETF, United States Oil Fund LP (USO), the leading Natural Gas ETF United states Natural Gas Fund LP (UNG) and the leading agricultural ETF Invesco DB Agricultural Fund (DBA).
But you must be wondering why the Bitcoin price fell after reaching the high of $49,000 just after the approval news broke. The crypto industry has a long history of buying the rumor and selling the news. But if we look at the broader perspective, Bitcoin is still above the price of $30,000 which was the starting point from where the news about the ETF approval brought the bullish narrative. So, this correction was expected as the investors were going to book the gains in the wake of the positive news.
This is generally what we see in the stock market too. Sometimes when the share is overhype, the investors bulk up on the shares and then wait for the news to book the profit. This is the sell the news phenomena. This drives the prices down if there are generally a huge number of sellers than buyers.
One factor fueling this was the Grayscale Bitcoin Trust. Upon the approval of the ETF, they came out of the closed end structure (wherein the investors were not allowed to withdraw). So, when the change was announced, the investors were ready to book their share of profits. The bankrupt FTX has sold off close to $1 billion in Grayscale holdings. Since January, Grayscale saw a total outflow of over $5 billion, but this number has seen a gradual reduction over the weeks. Apart from the Grayscale ETF, other ETFs did see an influx of funds.
After the 15 days of approval, the cumulative money flow per fund figures is shown below.
There is a net positive inflow of $1.5 Billion in ETFs. If we remove GBTC, we see that the new ETFs have added over $7.3 Billion in 15 days. On the 15th day 37,110 Bitcoins were sucked out of the market. This accounts to over 2500 Bitcoins per day and the miners mine 900 Bitcoins per day. New ETFs have over 176k Bitcoins in aggregate.
Crypto and TradeFi
With 2024 expected to be the year traditional finance embraces Bitcoin, questions arise about whether the influence of Bitcoin maximalists and decentralization advocates will diminish as large institutions participate. The decentralized nature of Bitcoin’s ecosystem may make it resistant to significant alterations by Wall Street titans, but the outcome remains unpredictable.
The approval of Bitcoin exchange-traded funds (ETFs) marks just one aspect of the intersection between the crypto industry and traditional finance (TradFi). Beyond ETFs, there has been a keen observation of developments in tokenization which uses blockchain technology to digitize real assets such as bonds, funds, or commodities. Central banks and major players in TradFi are exploring tokenization and some are already offering tokenized green bonds and funds. This shift is not only positive for ETFs but also benefits various players in the crypto industry, including custody solution providers and tokenizers. The approval of Bitcoin ETFs is expected to prompt banks to utilize these services and help themselves in generating increased revenue for companies operating in the crypto space. Despite crypto receiving less attention at tokenization conferences, there’s a notable convergence between the worlds of TradFi and crypto as is evident by the issuance of tokenized funds on blockchains like Ethereum and Stellar.
The U.S. Securities and Exchange Commission’s approval of the first batch of spot Bitcoin exchange-traded funds (ETFs) has triggered mixed reactions among crypto advocates. While some see it as a positive step towards mainstream adoption and market recovery while others express concerns about compromising the decentralization promise by aligning with traditional finance. The approval is seen as crucial for the industry’s reputation following the 2022 market collapse.
Long-time crypto supporters’ debate whether collaboration with traditional finance, including Wall Street and big banks, contradicts Bitcoin’s original ethos. There is speculation that Wall Street’s involvement may lead to a preference for Bitcoin mined with green energy or free from illicit activities. Some argue it’s an inevitable step for mainstream integration, making the asset class more accessible, while others fear it undermines the decentralised nature of Bitcoin. The ETFs are expected to simplify crypto investment for mainstream audiences, potentially influencing governments to adopt a less harsh stance on cryptocurrencies.
The Bitcoin Halving Effect
Bitcoin halving is the process in which the miners’ reward for the issuance of the new Bitcoin is cut in half. The block reward will come down to 3.125 bitcoin versus the 6.25 bitcoin today. The halving process happens every four years. The halving process happens every four years and the next halving is scheduled for April 2024. The halving process was put into the bitcoin algorithm to maintain the scarcity and counter inflation. There will ever be only 21 million bitcoins mined and 19 million bitcoins have been mined.
Historically, there has been a lot of volatility in Bitcoin prices before and after halving events. However, the price of Bitcoin typically rises significantly a few months later. While many other factors influence Bitcoin’s price, it appears that halving events are generally bullish for the cryptocurrency once the initial volatility subsides. However, while the halving reduces the reward for miners, it also reduces the supply of new coins without decreasing demand. If the economic theory holds true, as it has historically for Bitcoin, Bitcoin prices should rise dramatically in response to the supply shock. However, it is still unclear whether the historical price movement surrounding each halving was a direct result of the halving. Higher prices would provide incentive for miners to continue processing Bitcoin transactions.
Bitcoin’s last halving occurred on May 11, 2020, when the block reward was reduced from 12.5 BTC to 6.25 BTC. Bitcoin has grown at a compound annual growth rate of 52% since that event. The halvings prior to 2020 followed a similar pattern.
The approval of spot Bitcoin ETFs by the SEC has marked a significant milestone for the crypto industry in 2024. This positive development is expected to pave the way for increased institutional and retail investor participation in the cryptocurrency market. With Bitcoin halving scheduled for April, the industry is poised for further upgrades. The convergence between traditional finance and the crypto space, as seen in the ETF approvals and tokenization trends, brings both opportunities and concerns. While some worry about potential compromises to decentralization, others see this as an inevitable step towards mainstream integration.
The market has experienced fluctuations post-approval, influenced by factors like the “buy the rumor, sell the news” phenomenon and the Grayscale Bitcoin Trust restructuring. Looking ahead, the interplay between spot Bitcoin ETFs, the upcoming halving, and ongoing developments in the broader crypto landscape will continue to shape the industry’s trajectory in the months to come. As bridges are built to foster a connection between the traditional and the decentralized financial realms, the role of digital assets for the future becomes more prominent, leading to a growing legitimacy and faith of financial institutions and the government.