Despite all the headwinds, challenges and FUD, Bitcoin has led the crypto markets to a bumper year and the momentum may carry forward into the next year.
What a difference a year makes! Just look at the price action of the premiere digital currency Bitcoin (BTC) from the beginning of 2023 till now, and you will know what I am talking about (Figure 2). BTC started this year on extremely shaky ground at a mere $16,500 level. As of yesterday, Bitcoin surged to $44,490, marking its highest point since April 2022. This resurgence brings Bitcoin back to levels observed before the noteworthy downturns experienced by FTX (November 2022), Three Arrows Capital (June 2022), Celsius (June 2022), and even predating TerraUSD (May 2022).
Despite these high-profile failures and increasing chatter about regulatory crackdowns, cryptocurrencies vastly outperformed all the other financial assets. Boasting a year-to-date surge of 151%, and propelled by this week's climb to $44k - the highest level in 20 months, it has significantly outpaced both the S&P 500 and Gold (Figure 1). Much of the anticipation surrounds the forthcoming decision deadline for the spot Bitcoin ETF, anticipated to act as the biggest catalyst for further price movements. Renowned ETF analysts are envisioning a high probability of approval, projecting a likelihood of 90%.
Talking about the FUD (Fear, Uncertainty, Doubt) Global regulatory bodies have consistently cautioned against the inherent risks associated with cryptocurrencies. Specifically, U.S. regulators have criticized the crypto industry for inadequately addressing the issue of illicit finance. The G20's Financial Stability Board expressed concerns that cryptocurrencies could pose a threat to global financial stability. Additionally, the Bank for International Settlements asserted that crypto-assets do not represent the future of finance and have heightened financial risks in less developed economies.
Even the recent Binance saga last month didn’t stop the bullish run in Cryptos. The contagion event culminated in the resignation of the CEO of the world's largest cryptocurrency exchange. The company pleaded guilty to breaches of the Bank Secrecy Act, an anti-money laundering law, and other related charges. In this historic development, Binance was ordered to settle the charges by paying a record-breaking penalty of $4.3 billion, marking the largest fine in the history of the Treasury Department. So what gives then?
Looking ahead, I am still optimistic about crypto fortunes. These failures and hefty fines should be taken as a step towards more regulatory clarity which many have been seeking for years. This would ultimately pave the way for more widespread adoption of digital assets. Let’s look ahead to see what’s in store for the Cryptoverse in 2024.
Spot Crypto ETFs
Perhaps one of the biggest drivers of the rally in Bitcoin and associated cryptos has been the expected approval of spot Bitcoin and Ethereum ETFs. BlackRock, the world's largest asset manager, is at the center of this endeavor. It originally filed its spot Bitcoin ETF application in June - following it up with its application for spot Ethereum ETF in November. No wonder Crypto proponents have been enthralled by the prospects of these ETFs getting approved. Many analysts believe the U.S SEC (Securities and Exchange Commission) is on the verge of approving them.
And BlackRock is not the only one throwing its hat in the ring. Swiss asset manager Pando Asset recently became the 13th applicant for an approved spot Bitcoin ETF in the U.S. and joined the race with a dozen others, including BlackRock, ARK Invest, and Grayscale. To this effect, the SEC has reportedly held multiple rounds of talks with prospective ETF issuers, with issuers amending applications to meet regulators' expectations. A report from Galaxy estimates inflows in spot Bitcoin ETF products could rise from $14 billion in the first year to $39 billion within three years.
This is something that I have talked about earlier. Bitcoin halving is an in-built feature that reduces the reward miners receive for solving complex mathematical problems and validating transactions. This process occurs approximately every four years or precisely every 210,000 blocks. As the rate of new Bitcoins entering the market decreases, but the demand remains steady or even grows, the price tends to rise. It's a simple yet powerful equation that has historically fueled significant increases in Bitcoin's value following each halving event.
The cryptocurrency market's cycles of growth and decline typically pivot around the Bitcoin halving event. A report from crypto asset manager Grayscale suggests that the potential for this halving event, coupled with positive influences from a potential spot Bitcoin ETF approval, holds even more significance than in previous occurrences. This heightened impact is attributed to the existing distribution of the Bitcoin supply, primarily held by entities known for prolonged retention.
The year 2023 witnessed a significant surge in crypto enforcement actions, impacting major players in the industry, including Binance and Coinbase. Legal proceedings initiated by the SEC or even the Department of Justice targeted prominent figures. Former FTX CEO Sam Bankman-Fried faced allegations of fraud, resulting in a guilty verdict. Simultaneously, former Binance CEO Changpeng Zhao is currently confronting charges related to violating the Bank Secrecy Act.
In the aftermath of these developments, a discernible trend emerges, signaling a potential conclusion to the Wild West era of the crypto industry. The increased regulatory scrutiny and legal actions reflect a shifting landscape, hinting at a more regulated future for the cryptocurrency sector, not the end of it. Legacy financial institutions have, therefore, shown faith in the crypto space and entered the space.
And finally, many investors believe that interest rate hiking cycles in many countries may have wound down. In Europe, traders are currently fully factoring in six quarter-point rate reductions by the European Central Bank in 2024, marking the first instance of such comprehensive pricing. If these predictions materialize, the ECB would take the lead among major central banks, initiating rate cuts next year, with the Fed anticipated to follow suit with its initial reduction in May. Meanwhile, in the UK, market projections include three Bank of England cuts set to commence in June.
And you know what a low-interest rate regime means for risky assets like Cryptos. Investors borrow money to invest in high-risk assets. If the initial interest reduction by the U.S happens in May, it may very well coincide with the Bitcoin halving event - further bolstering the demand for the digital asset. There is also no doubt that more regulatory clarity is on the way. The only lack of clarity that currently remains is when the crypto ETFs get approved. If that happens in the near future, the cryptos may propel to new highs.
Originally Published on Substack.