The last few months have been relatively quiet around the crypto community. Digital currencies were stuck in the doldrums in an environment of rising interest rates, while the collapse of the FTX crypto exchange and negative headlines surrounding its competitor Binance continued to reverberate. Now, though, Bitcoin and the like are hitting the headlines more frequently again – but in a positive sense. There’s a simple reason for this: crypto assets have recently posted high premiums across the board. In jumping over the 40,000 barrier, the world’s biggest and best known digital currency, Bitcoin, is already back up to a market value in excess of USDbn 800. Its capitalisation has increased by more than half just since mid-October.
In the eternal game of “trust gained, trust lost” which has been going on for over a decade since Bitcoin was launched in 2009, crypto proponents currently have the better cards again. The jokers in their hand include potential Bitcoin and Ethereum ETFs. According to experts, the first ETF based on Bitcoin is set to be licensed in the USA at the start of 2024. Market observers anticipate that the green light from the SEC, the US stock market supervisory authority, will deliver a significant boost to demand for the most valuable digital asset. Another such passive investment solution is already in the planning stage for Ethereum, the number two on the crypto market. The SEC has just postponed for a few weeks its decision on whether to approve or reject an ETH spot ETF from asset manager Grayscale. A press release on 5 December indicated that the verdict will now be given on 25 January 2024.
As well as Grayscale, other companies such as BlackRock, VanEck and even Fidelity are waiting on a yes or no from the regulatory authority. According to ETF analyst James Seyffart from Bloomberg, when licensing a spot ETF the relevant committee is likely to approve applications from a number of companies at the same time so that none of the applicants gets a competitive advantage. His view is that approval for the BTC ETFs will be announced by 10 January 2024. The inflows that are expected to follow could then even propel Bitcoin towards an all-time high. There is already tangible interest ahead of the decision: according to SEC documents, for instance, BlackRock, the world's largest asset manager, which was among the first to apply for a BTC spot ETF, received seed capital to the tune of USD 100,000 from an unknown investor in October. While on the one hand a lot of new money is flowing into the crypto market, on the other the liquidity reserves of BTC are shrinking, with more and more bitcoins being stowed away in what are known as “illiquid wallets”. This in turn points to a trend towards accumulation by long-term investors. The total number of coins held illiquidly recently reached a record high (see graph).
Bitcoin and the like are also getting momentum from the latest movements in interest rates, however. Following a series of sharp hikes since early 2022, markets expect to see rates start to ease in the coming year. In light of declining inflation, down to 3.2% in the USA in October, the majority of analysts anticipate a first cut of 0.25 percentage points at the Fed’s March meeting. According to the CME FedWatch Tool, the likelihood of this downward step is 55%. A further three decreases are then predicted to come before the end of 2024. The correlation between interest rates and Bitcoin is relatively simple to explain: lower rates reduce the attractiveness of safer alternatives such as government bonds, for instance, whereas they act as a tailwind for riskier investments such as crypto currencies. The digital tokens are also getting support from the upcoming Bitcoin halving in 2024. What precisely this entails, and how investors can profit from the new appetite for Bitcoin and Ethereum, is revealed in the second part of this article.
Source: Glassnode
