The inside story on Bitcoin’s crazy gains
You don’t have to be a bitcoin investor to be fascinated by the cryptocurrency’s eye-popping run this year. You can’t look away from this spectacle.
Yesterday bitcoin hit its fourth record in six days, touching a high of US$73,664. Its gains have topped 70 per cent this year, and it’s dragging other cryptocurrencies up with it.
So what’s driving the appeal of this asset many still consider suspect? Deutsche Bank researchers Marion Laboure and Cassidy Ainsworth-grace reveal the reasons the cryptocurrency is trading at a record high and why, in their view, it will stay high.
Everybody loves Exchange Traded Funds
The United States Securities Exchange Commission approved the first U.s.-listed ETFS to track bitcoin on Jan. 10 and since then it’s been game on.
The SEC approved 11 applications from such heavyweights as Blackrock, Fidelity, Invesco and Vaneck.
By early March, Blackrock’s fund alone attracted $9.2 billion and Fidelity’s $5.3 billion.
This week, net daily inflows into U.S. spot bitcoin ETFS topped $1 billion for the first time.
“The reasons behind the rally are pretty clear. A rampant demand for the physically-backed ETFS amid a low market depth backdrop,” Manuel Villegas, digital assets analyst at Swiss private bank Julius Baer, told Bloomberg.
As funds buy up large piles of bitcoin, supply diminishes and the weekly issuance of about 6,300 tokens is “utterly dwarfed” by demand that has grown to about 40,000 a week, he said.
MORE ETFS ARE COMING
Cryptocurrencies are moving into the mainstream.
Futures ETFS, first approved in 2021, expanded access for regulated brokers and funds; now the approval of spot ETFS could further drive mainstream adoption by allowing direct crypto exposure, says Deutsche.
And there are more in the pipeline. The SEC is scheduled to decide on a spot ETF application for another cryptocurrency, Ethereum, by May 23, with a total of seven Ethereum ETFS pending.
Proshares has plans to launch five more cryptocurrency ETFS, one that would provide twice the daily exposure to a bitcoin tracking index, the analysts said.
“The crypto world is gradually moving toward greater institutionalization as traditional financial players enter the market,” they said.
Large investors such as hedge funds and companies are increasingly putting Bitcoin on their balance sheets.
“Overall, the evolving ETF landscape and participations of institutional players are helping crypto mature into a more established asset class,” said Deutsche.
THE BITCOIN HALVING NEARS
April 2024 will be a big deal in the world of cryptocurrencies.
Bitcoin miners use specialized computer hardware to validate transactions and record them permanently on the blockchain, and for this they are rewarded with newly minted bitcoins.
But every four years, the number of new bitcoins awarded to miners is cut in half to maintain scarcity. The next halving is next month.
Last time it happened in May 2020 the profit hit forced many miners to shut down outdated rigs — but anticipation of the event also boosted prices.
Bitcoin prices jumped 13 per cent a month ahead of the July 2016 halving and 27 per cent ahead of the May 2020 event.
RISK ON!
The unexpectedly strong performance of the U.S. economy and the S&P 500, thanks to the ‘ Magnificent Seven,’ has increased investors’ appetite for risk assets like bitcoin, said Deutsche.
That ‘Risk on’ attitude is only expected to increase as the Federal Reserve and other central banks begin to cut interest rates this year.
When the Fed cut rates during the pandemic, cryptocurrencies rallied, and when it hiked rates beginning in 2022, they retreated.