Original author: PSE Trading Trader@MacroFang
This major decision marks the end of a long-standing standoff between the U.S. Securities and Exchange Commission (SEC) and fund managers (Blackrock, Vanguard, etc.). This also represents a victory for the cryptocurrency industry. Citing last years court ruling that rejection of spot ETFs was inconsistent with approval of futures ETFs, the SEC clarified that this was not an endorsement of cryptocurrencies because of the multiple inherent risks involved. The approval was met with mixed reactions, with Bitcoin lagging behind Ethereum even as the overall cryptocurrency market experienced a rally. This is similar to commodity price action when gold ETFs were first launched. Despite the groundbreaking approval, there are still unanswered questions about ETFs for other cryptocurrencies. It is crucial to analyze what this approval means for Bitcoin inflows and its possible role in investment portfolios. This approval opens the door to a huge potential market.
SEC officially grants spot Bitcoin ETF approval following strong rally in Q4’ 23
Transactions surge after approval
The SEC’s approval led to the launch of 11 spot Bitcoin ETFs, with trading starting immediately. The first day alone saw more than $2 billion in transactions. Anticipation of the decision has led to increased trading volume in Bitcoin futures and spot, along with a surge in inflows into exchange-traded products. This highlights the hunger of the market, which is still rising sharply overall despite Bitcoins underperformance. The cryptocurrency market is eagerly awaiting the launch of ETFs for other cryptocurrencies.
Bitcoin volumes are clearly trending higher vs. Q3’ 23, but remain below 2021 – 2022 averages
Cryptocurrency Allocation: Asset Managers Quickly Buy BTC for Portfolios
After approval, Bitcoin is likely to gain a more prominent place in investment portfolios. However, broad inclusion in portfolios remains a distant reality. ETF approval facilitates the use of Bitcoin by large financial institutions. But for this emerging technology to fully mature, it needs to be more widely adopted. There is great anticipation for the launch of centralized investment vehicles for decentralized assets. As the cryptocurrency market continues to evolve, it is likely to remain a cyclical asset, largely influenced by risk sentiment.
Asset managers have continued buying BTC at a fast pace, and open interest has also risen sharply
Despite the SEC’s approval, widespread inclusion of Bitcoin in investment portfolios will still take some time. While approval expands Bitcoin’s addressable market, a massive rush into the asset class is unlikely. Financial advisors need to conduct extensive due diligence on ETF vehicles and cryptocurrencies as an asset class. Bitcoin’s cyclical nature, and its tendency to benefit from high stakes and a weak U.S. dollar (low interest rates), also undermines the “digital gold” narrative. The adoption and use of Bitcoin and its integration with traditional financial services will continue to be a focus. In our opinion, the most practical aspect of this industry is the basic use cases of blockchain technology.
2024 Outlook: Bullish for ETH
Like the initial gold ETF launch, BTC has lagged ETH in performance, even though cryptocurrencies overall have performed well. Cryptocurrencies sold off sharply during the first week of the new year after a research note was published citing reasons why the SEC was unlikely to approve spot ETFs (see Figure 6). In what many regard as a “classic” tandem of cryptocurrency events, the next piece of news moving the market came from the SEC’s account on X (formerly Twitter), posting the news that it had received approval for a spot ETF.
However, SEC personnel quickly came out to refute this claim, claiming that the commission’s accounts had been compromised, only to come out again less than 24 hours later to confirm the information posted by the hackers. Within days of the initial “bug” post, the cryptocurrency had already begun to rebound, although Bitcoin significantly lagged Ethereum’s performance.
Crypto price action similar to precious metals near launch of gold ETF
This price action is similar to what was happening in the precious metal when the gold ETF was first launched in 2004—albeit the latter on a longer timeframe—and we compared it here . In our opinion, the cryptocurrency market has moved on to the next narrative, with ETH rising more than BTC, possibly on anticipation that the cryptocurrency’s second-largest coin may also receive ETF approval. As such, we will be keeping a close eye on the progress of ETH inflows, as well as the situation for large altcoins compared to BTC, and once the dust settles, we will delve into new ETF inflows and liquidity in our bi-weekly report.
Macro Outlook 2024: Economic Positives for Bitcoin
Tech profit-taking: A golden start
As tech shareholders started realizing profits at the start of the year, they delayed sales until 2024 to avoid capital gains taxes incurred in 2023. This trend can be seen in the portfolio transactions handled by our team.
NASDAQ Bounced off October-23 lows
Better economic data: Neutral on federal rate hike
Last week saw an influx of data telling a positive story for the market. The economy is moving at a steady Kinlocks pace, neither strong enough to require tightening from the Federal Reserve nor weak enough to trigger a slowdown in profits. Signs of economic growth are encouraging amid strong jobless claims and favorable labor market reports. Despite the positive reported results, the real impact was slightly offset by a small decline in hours worked, which meant a fall in total hours worked.
Market reaction and inflation
The markets reaction to an expected slightly higher average hourly wage led to an initial sell-off in bonds. Rising wages are often mistaken as a sign of inflation. In fact, the gap between wages and inflation, which represents productivity growth, is very strong. Expected inflationary pressures may be affected by conflicts in the Middle East and possible disruptions to cargo ships transiting the Red Sea. Despite these concerns, the impact outside the oil industry was minimal, with other commodities holding steady or declining. Last weeks Consumer Price Index (CPI) and Producer Price Index (PPI) reports showed that inflation was largely in line with expectations - we are seeing signs of cooling.
US CPI
Interest rate cuts and continued growth
The next focus is on the Federal Reserves policy on interest rate cuts. The December meeting of the Federal Open Market Committee (FOMC) highlighted Chairman Powells flexibility to cut interest rates if the economy weakens. If real economic growth remains strong, the Fed is likely to keep interest rates on hold, leading to strong stock markets. Thanks to Powells flexibility, the likelihood of a recession is lower and the chance of continued growth or a soft landing is higher.
Market Outlook and Bitcoin Advantages
For 2024, the SP 500 is expected to see 8 – 10% growth, with small-cap stocks expected to appreciate approximately 15%. The long-term outlook for the bond market beyond 2024 points to a stabilization of the federal funds rate at 3% – 3.5%, with a positive term premium of 50 – 75 basis points.
SPX
Market trends combine with Bitcoins underlying upside, and the cryptocurrency could see significant appreciation. Economic growth is likely to drive increased use and value of Bitcoin as more businesses and individuals use it for transactions. In addition to being a standalone asset, Bitcoin’s potential as an alternative to traditional fiat currencies could also benefit significantly from continued economic growth. As education and awareness of Bitcoin increases, so will its acceptance and potential to meaningfully contribute to economic growth. As more people accept and use Bitcoin, the value of this digital currency will further increase, leading to wider use and greater integration into the mainstream economic market. Therefore, the combination of strong economic growth and increasing Bitcoin usage creates a favorable environment for Bitcoin’s value to increase.
