Why is Bitcoin rising again?

Bitcoin is back. Again. Nothing new there, one might say. The price increases, it goes down. Often at high speed.

Except this time there might be something new because the number one cryptocurrency in the world looks set to attract a new source of demand and investors are buying now before prices take off.

Given all the sadness out there, it seems strange that the world frothiest asset class should suddenly bubble up just as everything else falls away.

So is there something in it, or is it a distraction that investors could do without?

The tech renaissance in the United States has generated most of the excitement during this volatile year, as investors look for ways to monetize the artificial intelligence revolution.

Yet while investors obsessed over runaway stocks like chipmaker Nvidia, many overlooked Bitcoin’s quiet resurgence.

Its price is up 105.41 percent year-to-date, and while that figure is lower than Nvidia’s blockbuster return of 181.7 percent, it’s still impressive.

Bitcoin opened the year at around $16,605 and spent the summer around the $25,000 mark.

Then it suddenly soared to an 18-month high of $35,000 following reports that U.S. regulators were preparing to approve the first spot Bitcoin exchange-traded fund (ETF).

A “physical” Bitcoin ETF would allow private and institutional investors to track the price of Bitcoin without the risk or difficulty of purchasing it, making it much easier to access their portfolios and retirement plans.

Even if they don’t like, trust, or understand Bitcoin, they can still be exposed to it for diversification purposes, just as they can hold gold, commodities, cash, or any other asset class.

Speculators rushed into Bitcoin, while Andre Dragosch of Deutsche Digital Assets also blamed the price surge on a “short squeeze”, with investors betting the price would fall rushing to close their positions.

He also warned of a possible short-term price correction, which would surprise precisely no one.

The U.S. Securities and Exchange Commission appears to have fought a losing battle to prevent ETFs from investing directly in Bitcoin, citing risks such as fraud and market manipulation.

Although the SEC gave the green light to ETFs holding Bitcoin and Ethereum futures, it remained on guard following the collapse of crypto exchange FTX, whose co-founder Sam Bankman-Fried is currently 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 from Grayscale Investments to launch a spot Bitcoin ETF, and made its decision official on October 24. The SEC should not appeal.

Some of the world’s biggest asset managers are now lining up to jump into this new sector, says Vijay Valecha, chief investment officer at Century Financial.

BlackRock, which manages the iShares line of ETFs, as well as Fidelity and Invesco are closely following the SEC’s case.

In fact, BlackRock has listed its IBTC ticker on the Depository Trust and Clearing Corporation website, a critical precursor to listing a new ETF.

Long-term Bitcoin bull Cathie Wood at ARK Invest has created a Bitcoin ETF in partnership with 21Shares.

While Bitcoin has pulled back since hitting $35,000, Valecha says if Bitcoin bulls continue their momentum, the next hurdles will line up at $36,507 and further down to $38,579.

Alternatively, it could just as easily break through its $31,212 support level.

It’s quite a comeback for Bitcoin, but the price still remains well below its all-time high of around $66,000, which it reached in November 2021.

This turned out to be the high point for risk assets, just before inflation and interest rates skyrocketed and Russia invaded Ukraine.

The crypto winter was long and hard, and some would-be investors completely lost interest in Bitcoin, as the new era of higher borrowing costs and lower growth spooked speculators and the crypto team. quick enrichment.

Exaggerated claims that Bitcoin was “digital gold” also seemed exaggerated, as its price collapsed along with that of stocks and bonds in 2022. Rather than a store of value, it began to resemble a destroyer of wealth.

Crypto, however, has a clear corollary with gold. Neither pays income, making them less attractive at a time when investors can earn positive returns through bonds and cash.

That hasn’t stopped Bitcoin lately as price and liquidity recover, but Justin d’Anethan, head of business development for Asia Pacific at crypto market maker Keyrock, reminds investors that the recent rise is “still nothing compared to the euphoria of 2020”. 2021”.

This could now change as Bitcoin lives and dies depending 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 return below $32,000 would erase the short-term bullish bias at this point,” he adds.

Unlike futures products such as CME Group’s Bitcoin futures contract, physical spot ETFs will “fundamentally shift the supply/demand balance in a bullish way,” says Weller, as funds would be expected to buy and hold Bitcoin at height of assets under management. .

Bitcoin has fallen slightly in recent days in a “buy the rumor, sell the fact” logic, but Mr. Weller says the price is benefiting from two other “overall tailwinds.”

First, history suggests that the price is likely to enter a bullish period as the next “halving” approaches in April 2024.

This is where the reward for mining new blocks is cut in half, meaning miners receive 50% fewer Bitcoins to verify transactions.

They occur approximately every four years and tend to drive up prices by reducing the supply of new Bitcoins generated by the network.

The second major tailwind is the long-awaited approach to maximum interest rates, with signs that central banks like the US Federal Reserve are done with hikes.

So that represents 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 should still keep in mind that this is a highly speculative asset and they should only stake a small portion of their portfolio. Or maybe wait for that ETF.

Updated: November 1, 2023, 5:00 a.m.