This momentous decision marks the end of a long-running standoff between the U.S. Securities and Exchange Commission (SEC) and fund managers (Blackrock, Vanguard, etc.). It also represents a victory for the cryptocurrency industry. Citing last year’s court ruling that the rejection of a spot ETF was inconsistent with the approval of a futures ETF, the SEC clarified that this was not an endorsement of cryptocurrencies because of the multiple inherent risks involved. The approval has drawn mixed reactions, with Bitcoin lagging Ethereum’s performance despite a rally across the cryptocurrency market. This is similar to the commodity price action when the gold ETF was first launched. Despite the groundbreaking approval, there are still unanswered questions for other cryptocurrency ETFs. It is crucial to analyze what this approval means for Bitcoin inflows and its possible role in an investment portfolio. This approval opens the door to a huge potential market.
SEC officially grants spot Bitcoin ETF approval following strong rally in Q4’23
Sharp increase in transactions after approval
The SEC’s approval led to the launch of 11 spot Bitcoin ETFs, with trading commencing immediately. The first day alone witnessed over $2 billion in trades. Anticipation of the decision led to increased volumes in Bitcoin futures and spot, along with a surge in inflows into exchange-traded products. This highlights the eagerness of the market, which has been surging overall despite Bitcoin’s 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
Crypto Allocation: Asset Managers Quickly Buy BTC for Portfolios
After the approval, Bitcoin may gain more prominence in investment portfolios. However, widespread inclusion in portfolios remains a distant reality. ETF approval facilitates the use of Bitcoin by large financial institutions. But in order for this emerging technology to fully mature, wider adoption is needed. There is great anticipation for the launch of centralized investment vehicles for decentralized assets. As the cryptocurrency market continues to develop, it is likely to remain a cyclical asset that is 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 take time. While the approval expands the potential market for Bitcoin, a mass rush into this asset class is unlikely. Financial advisors need to perform extensive due diligence on ETF instruments and cryptocurrencies as an asset class. The cyclical nature of Bitcoin, and its propensity to benefit due to high equity and a weak dollar (low interest rates), also undermines the “digital gold” narrative. Bitcoin’s adoption and usage and its integration with traditional financial services will continue to be a focus. In our view, the most practical aspect of this industry is the fundamental use cases of blockchain technology.
2024 Outlook: Bullish on ETH
Like the initial gold ETF launch, BTC lagged behind ETH in performance, despite cryptocurrencies performing well overall. In the first week of the new year, cryptocurrencies sold off sharply after a research report was published that listed reasons why the SEC was unlikely to approve a spot ETF (see Figure 6). In what many see as a “classic” cascade of events in cryptocurrencies, the next piece of news that moved the market came from the SEC’s account on X (formerly Twitter), announcing that a spot ETF had been approved.
However, SEC officials quickly refuted the claim, claiming that the Commission’s accounts had been compromised, but less than 24 hours later, they came out again to confirm the information posted by the hacker. Within days of the initial “erroneous” post, cryptocurrencies had begun to rebound, although Bitcoin’s performance was significantly underperforming Ethereum.
Crypto price action similar to precious metals near launch of gold ETF
This price action is similar to what happened to the precious metal when the first gold ETF was launched in 2004 — although the latter timeline is longer — which we compared here. In our opinion, the crypto market has shifted to the next narrative, with ETH rising more than BTC, likely on the expectation that the second largest token in crypto may also receive ETF approval. As such, we will closely monitor the progress of ETH inflows, as well as the situation of large altcoins compared to BTC, and take a deeper look at new ETF inflows and liquidity in our bi-weekly report once the dust settles.
2024 Macro Outlook: Economic Positives for Bitcoin
Tech profit taking: Gold starts the day
As technology stock shareholders began to realize profits at the beginning of the year, they delayed sales until 2024 to avoid capital gains taxes that would have occurred 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 Fed rate hike
Last week saw an influx of data that told a positive story for the markets. The economy is moving at a steady “kinlocks” pace, neither strong enough to require tightening by the Federal Reserve (Fed) nor weak enough to trigger a slowdown in profits. Signs of economic growth were encouraging in the form of strong jobless claims and a favorable labor market report. Despite the positive results of the report, the real impact was slightly offset by a small decline in hours worked, which means a decline in total hours worked.
Market reaction and inflation
The initial bond sell-off was driven by the market’s reaction to slightly higher average hourly earnings in expectations. Rising wages are often mistaken as a sign of inflation. In reality, the gap between wages and inflation represents productivity growth, which has been very strong. Expected inflationary pressures could be tempered by the conflict in the Middle East and potential impacts on cargo ships passing through the Red Sea. Despite these concerns, the impact outside the oil industry was minimal, with other commodities remaining stable or falling. Last week’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports showed inflation largely in line with expectations — and we are seeing signs of cooling.
US CPI
Rate cuts and continued growth
The focus will then be on the Federal Reserve’s policy on interest rate cuts. The December FOMC meeting highlighted Chairman Powell’s flexibility to cut interest rates if the economy weakens. If real economic growth remains strong, the Fed will likely maintain interest rates, leading to a strong stock market. Due to Powell’s flexibility, the probability of a recession is lower and the chances of continued growth or a soft landing are higher.
Market Outlook and Bitcoin Advantages
For 2024, the S&P 500 is expected to grow by 8–10%, and small-cap stocks are expected to appreciate by about 15%. The long-term outlook for the bond market beyond 2024 points to a stable federal funds rate at 3% — 3.5%, with a positive term premium of 50–75 basis points.
SPX
Market trends combine with Bitcoin's 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
