What's Happening with Bitcoin?

Bitcoin price briefly crossed $42,000 for the 1st time in 18 months just yesterday! Bitcoin is up over 150% since January 1st, and up almost 50% in the last 2 months, making it one of the best performing investments of 2023.

This recent rise is due to 4 reasons ranked in order of importance:

1. Enthusiasm over the approval of spot Bitcoin ETFs in early January
2. US Fed starting to cut rates soon
3. Bitcoin halving in May 2024
4. Rising Bitcoin prices begets more rise in Bitcoin prices

Let's examine each point more closely.

Spot Bitcoin ETF Approval

Ark Invest filed for approval for a Bitcoin ETF (Exchange Traded Fund) in April this year. Not too long after, in June, BlackRock, the world’s largest asset manager, filed for an ETF as well. News of BlackRock's filing caused Bitcoin price to rise 20% in June. However, the hype slowly fizzled out as approval stalled and by September the price of Bitcoin was back to the same level it was before the news.

However, something changed these past few months. In October, The US SEC said they will not appeal a court ruling that could allow Grayscale to launch a spot ETF. Bitcoin traders and investors took this as a signal that the SEC may not stand in the way of approving Bitcoin spot ETFs.

Also, the SEC faces a final deadline to respond to ARK Invest and 21Shares's spot Bitcoin ETF application by January 10, 2024, and BlackRock's application by March 15, 2024. So, we should get their decision in the next few weeks. Also in October, a senior Bloomberg analyst was quoted saying that they believe there is a 90% chance of approval!

Put simply, the price of Bitcoin has risen because in a few weeks, some large investors should receive the greenlight to buy Bitcoin.

Why is this important?

The price of Bitcoin is heavily influenced by demand and supply. If more money is buying Bitcoin, the price tends to go up. Some estimates expect that that these ETFs could bring in as much as $70bn in new demand for Bitcoin. Which seems like a lot of money but is only 0.8% of BlackRock's AUM of over $8.5trillion!

N.B.: A slight nuance here that some may not be aware of is that Bitcoin Futures ETFs that have been in existence since October 2021. Without getting too technical, the difference between a spot and future ETF is a spot (bitcoin) ETF directly buys and owns Bitcoin, while a futures ETF indirectly buys and owns Bitcoin through derivatives contracts (futures). So, more money/demand directly coming into Bitcoin through a spot ETF should have a more significant impact on the price of Bitcoin than it would if it were coming through a Futures ETF.

Point of caution here: It's worth noting that a spot Bitcoin ETF approval would not mean BlackRock and co will start buying Bitcoin right away. It should take some time for them to get the financial plumbing done for the funds to start flowing into Bitcoin. After that happens, nobody knows exactly how much BlackRock and other ETF issuers will actually allocate. Many estimate it will be a sizable position but it's hard to know how much this will actually be. Some expect demand could be as high as $3bn in the 1st day of trading.

Fed Cutting Rates

The next reason why Bitcoin prices have been rising is the expectation that the US Fed should start cutting interest rates soon which should mean that risky assets like stocks and Bitcoin would become more attractive to investors as they look for higher returns on their money.

This impact is a bit overstated in my view because even when the Fed starts cutting rates, it is unlikely that interest rates go back to the super low levels (~0%) we saw in 2021 when Bitcoin soared to $67,000.

Bitcoin Halving in May 2024

This is a "longer" term driver for Bitcoin. By longer, I mean 6-18 months (which is quite a long time in cryptoland, I joke). The next Bitcoin halving is in May 2024. The long and short of this is, when Bitcoin halves, the supply of Bitcoin falls, and this should ultimately cause Bitcoin price to rise (in line with the economic principle of demand and supply). Bitcoin hit record prices 6-18 months after each of the three prior halvings in 2012, 2016, and 2020. So, if history is any guide, another all-time high bitcoin price could be coming in 2024/25.

But what do investors always say in the footnotes of their presentations? Past performance is not a guarantee of future performance.

Rising Prices Begets more Price rise

People feel more motivated to buy Bitcoin when the price is rising than when it's falling. I think an underappreciated driver of current Bitcoin prices is FOMO. Bitcoin, like any meme stock, has the uncanny ability to inspire a bad case of FOMO (Fear of Missing Out) in the average by stander. And like every meme stock, no one ever knows when the gravy train dries up.

While I haven't seen a lot of crypto bros pushing Bitcoin heavily on my Twitter timeline, it is often the case that "crypto bros" use sharp Bitcoin price rises (as we are now seeing) as a "marketing" ploy to entice bystanders into buying some. Also, Bitcoin price action tends to get a lot of press. I mean, look at me, coming out of "retirement" just to talk about it. I'm literally a walking case in point.

When the average person sees stock/crypto prices rising, they tend get this feeling in their stomach, that they could be participating in that rise. E.g. "if I had invested $1000 at the start of the year in Bitcoin, I'd have over $2000 today". Or "if I had invested the same $1000 2 months ago, I would have $1500". Which are both outstanding returns. That emotion, that nagging thought at the back of your mind is the Fear of Missing Out (FOMO), it's seldom financially beneficial to lean into that feeling.

The "best" or a better time to invest in something is when it feels very uncomfortable to do so. Buying unloved and misunderstood valuable assets tend to give better returns than buying out of FOMO.

Final Thoughts

While Bitcoin is up over 100% today, it is down almost 50% from its all-time high of $67k. So, if you had bought $1,000 of Bitcoin in Nov 2021, you'd be left with about $650. Unless you have strong belief in Bitcoin as an asset that continues to grow in value or as a currency for transacting, FOMO can really be costly on this one.

Remember the old finance saying

Be greedy when others are fearful and fearful when others are greedy

Consider the CMC Fear & Greed Index