Bitcoin and other cryptocurrency investments have climbed in the past few months, mostly for one big reason: anticipation of spot bitcoin ETFs. And the eagerly awaited launch is almost here.
Regulatory approval of spot bitcoin ETFs is likely in the next few days. The SEC issued final comments to applicants late Monday and asset managers are hustling to submit responses as of early Tuesday. A spot bitcoin ETF would directly hold bitcoin assets. In contrast, ProShares Bitcoin Strategy ETF (BITO), the first U.S. bitcoin-linked ETF, invests in bitcoin futures contracts. Spot bitcoin ETFs are expected to create new and bigger opportunities for institutions to invest in cryptocurrencies and other digital assets.
“We are at the beginning of the first-ever institutional bull market in crypto — and spot ETF momentum is a key part of the momentum,” said Diogo Monica, president and co-founder of Anchorage Digital. Anchorage helps institutions buy, store and manage digital assets.
But while some crypto enthusiasts tout spot bitcoin ETFs as a major tailwind for digital assets in 2024, others say regulatory approval could become a sell-the-news event in the short run.
Bitcoin spiked to 20-month highs above $45,000 to start 2024 and briefly eclipsed $47,000 on Monday. Marathon Digital (MARA), CoinDesk (COIN), Riot Platforms (RIOT) and other crypto-related stocks skyrocketed in recent months. But they pulled away from highs since late last week.
How Bitcoin ETFs Will Drive Institutional Demand
Thirteen spot bitcoin exchange-traded fund applications await approval from the Securities and Exchange Commission. They include applications by BlackRock (BLK), ARK Invest, Grayscale Investments, WisdomTree, VanEck, Valkyrie, Invesco and Fidelity.
The window for the SEC to approve ETF applications opens on Friday, Jan. 5 through Jan. 10, Bloomberg Intelligence ETF analyst James Seyffart reported on Dec. 1 via X. Those dates correspond to deadlines for an application filed by Cathie Woods’ ARK Invest, according to Forbes.
Seyffart expects approvals between Jan. 8 and Jan. 10. He sees a 10% chance or less that the SEC will decline to approve filings by Jan. 10. The SEC could technically issue approval orders on at least nine applications before the window, Seyffart posted.
SEC Imposed December Deadline
The SEC gave bitcoin ETF applicants a Dec. 29 deadline for final updates. If they missed it they would risk missing the first wave of potential approvals, Fox Business reported. Both BlackRock and ARK Invest updated their applications at regulators’ request in the week of Dec. 18 to allow cash redemptions, rather than limiting withdrawals to bitcoin. Grayscale Investments currently operates a $26 billion bitcoin trust, which it hopes to convert to an ETF. CoinDesk says it’s the world’s largest bitcoin investment vehicle. Grayscale also amended its filing on Dec. 26 to adopt the cash redemption model.
ARK CEO Cathie Wood expects the SEC will approve a few ETF applications at one time, she said during a Dec. 26 interview with Yahoo Finance.
Data indicates the demand increase has already started, according to derivatives exchange Deribit. Chief Commercial Officer Luuk Strijers told The Block, a crypto news site, there’s been a “noticeable uptick in institutional activity” since late October. A 2022 Nasdaq survey of 500 financial advisors found 72% of firms would be more likely to invest client assets in crypto if spot ETF products were offered in the U.S.
“A spot bitcoin ETF would streamline exposure for traditional players who have been slower to enter the ecosystem, allowing trillions in institutional capital to come off the sidelines,” Anchorage Digital’s Monica said. “We expect to see major institutions — including hedge funds, sovereign wealth funds and registered investment advisors — drive ETF inflows.”
Anchorage Digital operates a crypto platform for institutions and is valued at over $3 billion. It boasts backing from heavyweight investors like KKR & Co. and Goldman Sachs (GS). Clients span venture capital firms, registered investment advisors, asset managers and crypto protocols, including Apollo Protocol and Visa (V).
Final Amendments, Fees Revealed
The New York Stock Exchange, Nasdaq and Cboe filed 19b-4 amendments for 11 of the bitcoin ETF proposals by Jan. 5. The 19b-4 filings include rule changes for the SEC to approve, giving exchanges permission to list the funds.
Meanwhile, 11 of the asset managers filed amendments to their S-1 applications as of Jan. 8 after discussions with regulators, Reuters reported, with 10 submitted on Jan. 8. BlackRock, ARK Invest and Grayscale submitted filing amendments early Jan. 9 to address last-minute comments and make final tweaks to the language. Bloomberg analyst James Seyffart expects the rest of the applicants to post their filings through Tuesday morning.
Elsewhere, SEC representatives said they have “no additional feedback” ahead of the votes this week, Bloomberg reported on Jan. 5. The SEC will need to approve the 19b-4 filings and S-1 filings before the ETFs can launch. Multiple issuers on Friday said they expect to receive final approval for S-1 filings by late Tuesday or Wednesday, Reuters reported.
Several ETF hopefuls also published the management fees issuers plan to propose, which range from 0.24% to 1.5% excluding waivers.
Many of the potential ETF issuers are already amassing seed funding ahead of their respective launches. Bitwise in late December announced a planned $200 million seed investment, compared to the $10 million investment announced by BlackRock. VanEck has lined up $72.5 million for its potential spot bitcoin ETF.
ETF Impact On Bitcoin Price
Despite the institutional potential, analysts are divided on the impact ETF approvals will have on bitcoin’s price.
“An SEC-regulated spot ETF for bitcoin would be a first-of-its kind for the digital asset ecosystem, so the industry will be watching price action closely,” Monica said. “The amount and rate of ETF inflows will likely be a key factor affecting the price of bitcoin in the short-term and long-term.”
VanEck estimates the bitcoin spot market will generate $310 million of inflows in the first few days of a spot bitcoin ETF approval. It forecasts spot bitcoin ETF inflows of $750 million within a quarter and $40.4 billion over the first two years as bitcoin takes “significant market share” from gold. That’s according to Matthew Sigel, head of digital asset research, in VanEck’s 15 Crypto Predictions for 2024 report.
Such inflows into newly approved spot bitcoin ETFs would seem certain to prop up bitcoin’s price.
“Notwithstanding the possibility of significant volatility, the price of bitcoin is unlikely to fall below $30k in Q1 2024,” Sigel wrote.
It’s worth noting that $30,000 is nearly 35% drop from where the cryptocurrency traded on Monday. Meanwhile, Grayscale Investments CEO Michael Sonnenshein expects a spot bitcoin ETF could unlock around $30 trillion worth of advised wealth once finally approved, according to a Dec. 18 interview with CNBC.
Sell The News Of Bitcoin ETFs?
Cathie Wood thinks the first wave of approvals could see the bitcoin price drop as investors take profits.
“There has been a big anticipatory move,” Wood told Yahoo Finance. “Those who have been moving in and enjoying some nice profits will probably sell on the news.”
But that is just in the short term. Wood thinks institutions have been hesitant to participate in crypto before the SEC approves a spot bitcoin ETF. “All we need is for the trillions of dollars in institutional assets out there to allocate maybe 0.1% or 0.2% to an ETF,” Wood said. “And that will move the price significantly.”
JPMorgan also sees a high chance of a sell-the-news event, and is more cautious than many firms about crypto in 2024.
“Excessive optimism by crypto investors arising from an impending approval of spot bitcoin ETFs by the SEC has shifted bitcoin to the overbought levels seen during 2021,” a team of analysts led by Nikolaos Panigirtzoglou wrote. They expect that existing capital will shift within the crypto ecosystem, rather than new capital rushing in.
On the regulatory front, SEC Chair Gary Gensler says he’s still concerned about illicit activity in crypto, despite the agency taking a new look at spot bitcoin ETF applications following fall court rulings.
“There’s been far too much fraud and bad actors in the crypto field,” Gensler told CNBC on Dec. 14. “There’s a lot of noncompliance, not only with the securities laws, but other laws around anti-money laundering and protecting the public against bad actors there.”
The Death Of Bitcoin?
Arthur Hayes, co-founder of crypto derivatives platform BitMex, says institutional participation could be detrimental to the bitcoin network.
“If ETFs managed by TradFi (traditional finance) asset managers are too successful, they will completely destroy bitcoin,” Hayes wrote in a Dec. 23 blog post. He noted that bitcoin block rewards will fall to zero sometime around 2140, at which point miners will only receive transaction fees for validating transactions.
“But if there was never another bitcoin transaction between two entities, miners would be unable to afford the energy it costs to secure the network,” Hayes wrote. “As a result, they would shut off their machines. Without the miners, the network dies and bitcoin vanishes.”
Hayes argued asset managers like BlackRock are in the “asset accumulation game.”
“They vacuum up assets, store them in a metaphorical vault, issue a tradable security and charge a management fee,” he wrote. “They don’t use the things they hold on behalf of their clients, which presents a problem for bitcoin if we take an extreme view of a possible future.”
Still, even if bitcoin “dies because it isn’t being used,” that creates a space for another crypto network to take its place, Hayes wrote.
But Monica and Anchorage Digital disagree that traditional finance firms will negatively impact the cryptocurrency.
“Rising institutional participation will continue to advance a promising long-term outlook for bitcoin and the asset class as a whole,” Monica said. “A spot ETF would unlock a world where bitcoin can be in every retail and institutional portfolio. That possibility represents a major market opportunity.”
Bitcoin Halving: The Next Milestone
But spot bitcoin ETF approval isn’t the only driving factor for bitcoin in 2024. The next halving event is expected around April. Halving events help control the finite supply of 21 million bitcoin by cutting in half the amount of crypto rewards doled out to miners.
The last bitcoin halving event occurred in May 2020, when mining rewards fell to 6.25 bitcoin per block mined from 12.5 bitcoin per block. Some refer to the events as halvenings, a portmanteau of “halving” and “happening.”
Halving events occur after every 210,000 bitcoins are mined, which takes roughly four years. The price of bitcoin has historically risen in the months after halving events as the creation of new bitcoins slows.
“It’s essentially a kind of supply shock on the market where the total amount of supply that’s coming on is cut in half,” Will Clemente, Reflexivity Research founder and crypto bull, previously told IBD. “Just from a raw supply-demand standpoint, you have less supply coming onto the market. Even if demand stays the same, price starts to drift upwards.”
Impact On Bitcoin Miners
Grayscale also expects a positive impact on valuations from the limit to new token supply growth combined with new potential investors.
But JPMorgan analysts argue the next halving event is “largely priced in.”
“This argument seems unconvincing as the bitcoin halving event and its effect are predictable and in our opinion are well factored into the current bitcoin price,” Panigirtzoglou wrote.
And research from publicly traded exchange Coinbase notes that even though halving events improve supply-demand technicals, they may not be the direct catalyst for crypto bull runs.
“In our view, the halving’s underlying significance lies in its ability to raise media attention around what makes bitcoin unique: a fixed, disinflationary supply schedule,” a team lead by David Duong, head of institutional research, wrote in the Coinbase Institutional 2024 Crypto Market Outlook.
Power Needed To Mine Bitcoin Climbing
Moreover, the hash rate, or computational power to mine bitcoin, continues to increase. That makes it harder to mine new bitcoin. The reduction in mining rewards combined with higher processing power requirements could lead to consolidation among bitcoin miners as profit margins narrow, Duong wrote.
Sigel of VanEck agrees the next halving event will create winners and losers. “Unprofitable miners will disconnect, ceding shares to those with low-cost power,” he wrote. Sigel doubts it will stress the public markets thanks to improved balance sheets of listed bitcoin miners such as Marathon Digital and Riot Platforms. They control about 25% of the global hash rate.
Sigel predicts miners overall will underperform bitcoin’s price before the halving, although low-cost miners such as CleanSpark (CLSK) and Riot should outperform the field. He expects bitcoin to rise above $48,000 post-halving, after consolidating for several days or weeks as the market digests selling pressure from unprofitable miners.
“After the halving, we expect at least one publicly traded miner to be 10x by the end of the year,” Sigel wrote.
Bitcoin Price Outlook
Despite concerns of short-term dips, the consensus is that spot bitcoin ETF approval and bitcoin halving will be positive catalysts in 2024.
VanEck forecasts bitcoin will reach an all-time high in November, three years after its previous record of $69,000 in November 2021.
Duong’s team at Coinbase expects bitcoin to be the main driver for crypto in 2024. “Although there will be a temptation to see bitcoin profits rolled into tokens further out the risk curve, we think bitcoin will continue to be the anchor for the digital asset class in 2024,” the analysts wrote.
Bitcoin topped $46,700 on Jan. 9, surging from $27,000 at the end of September as ETF anticipation grew. The world’s largest cryptocurrency rebounded 158% in 2023.
Bitcoin Stocks 2023 Performance
Bitcoin’s price surge has spilled over into crypto-related stocks.
Cryptocurrency exchange Coinbase vaulted 64% from a November cup-base breakout to a late-December high. For all of 2023, COIN stock skyrocketed 423%.
Coinbase has the potential to become “one of the few network winners in an industry we expect to grow exponentially from here,” according to JPM Securities, which has an overweight rating and $200 price target on COIN stock.
Grayscale Bitcoin Trust rallied 69% from a mid-October breakout. GBTC spiked 337% in 2023.
And bitcoin miner Marathon Digital rocketed 96% in December and catapulted more than 800% in 2023.
You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison
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