Home Brokerage Bitcoin’s Reputation Shines Brightly in 2024

Bitcoin’s Reputation Shines Brightly in 2024

by internationalbanker

By Nicholas Larsen, International Banker

 

Depending on one’s location, the evening of April 19 or the early hours of April 20 saw the Bitcoin block complete its eagerly anticipated reward halving, thus triggering a programmed cut in the rewards earned by the network’s miners. One of crypto’s most momentous and eagerly anticipated events, the halving finally came to pass amid burgeoning market bullishness that saw its price climb to uncharted territory above $73,500 just a month earlier. And with the landmark approval of spot exchange-traded funds (ETFs) in January by US regulators, as well as its growing popularity as legal tender in some countries, bitcoin’s reputation has perhaps never shone brighter during its turbulent and much-fabled 15-year history.

Indeed, the media frenzy that built up in the days and weeks before the Bitcoin halving event underscores the sheer importance the world’s leading cryptocurrency now commands across financial markets. The event is programmatically coded into the Bitcoin protocol to occur every 210,000 blocks on the Bitcoin blockchain, or roughly every four years, with the previous ones occurring in 2012, 2016 and 2020. It automatically halves the rewards for mining—that is, the process employed to create new bitcoins and validate new transactions on the blockchain—which correspondingly halves the frequency at which new bitcoins are mined and thus reduces the rate at which new bitcoins are added to circulation.

Bitcoin’s initial block reward was 50 BTC (bitcoins), while the latest halving cut the reward from 6.25 BTC to 3.125 BTC. Unlike traditional fiat currencies that are subject to inflation when governments and central banks increase the money supply circulating within an economy, therefore, a Bitcoin halving aims to cultivate a disinflationary environment for the bitcoin currency over time, which in previous halving events proved hugely bullish for the price of the digital asset.

But while those earlier three halving events resulted in stellar rallies for bitcoin—93 times in 2012, 30 times in 2016 and 8 times in 2020 from each halving day price to the top of its respective bull cycle—they did not coincide with an enormous influx of institutional interest in the digital currency via ETFs, as has been the case for the most recent halving event a few days ago. “The halving is the ultimate geek event for bitcoiners, but the 2024 iteration takes it up a notch because reduced supply combined with fresh ETF demand creates an explosive cocktail,” Antoni Trenchev, co-founder of crypto exchange Nexo, explained to CNBC on April 11. “What makes this halving unique is Bitcoin has already surpassed the last cycle’s high—something it’s never done ahead of the quadrennial event—which makes trying to forecast the length and ferocity of this cycle much trickier.”

Indeed, the record highs achieved during this ongoing cycle before the halving can be mostly attributed to the massive spike in institutional money entering the space off the back of a more favourable regulatory environment. After more than a decade’s worth of attempts by a multitude of financial institutions and key stakeholders to obtain approval for ETFs to track the spot bitcoin market, the U.S. Securities and Exchange Commission (SEC) finally gave the green light on January 10 for 11 applications for US-listed ETFs to move ahead in a watershed moment for the global cryptocurrency industry.

The court’s ruling was dubbed a “historic milestone for American investors” by Grayscale Investments’ chief executive officer, Michael Sonnenshein. Indeed, it set a monumental precedent for the crypto industry by first forcing the SEC to reassess its regulatory approach towards bitcoin and the handful of ETF applications that were still pending and then eventually by the regulator relenting and finalising approvals in January of the 11 ETF applications, including those from BlackRock, Ark Investments, Fidelity Investments, Invesco, VanEck, WisdomTree Investments, Bitwise Asset Management, Valkyrie Investments and Grayscale Investments.

“Beginning under Chair Jay Clayton in 2018 and through March 2023, the Commission disapproved more than 20 exchange rule filings for spot bitcoin ETPs [exchange-traded products]. One of those filings, made by Grayscale, contemplated the conversion of the Grayscale Bitcoin Trust into an ETP,” the SEC’s chair, Gary Gensler, stated at the time of the approvals. “The US Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP…. Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares.”

In the three and a half months since that landmark approval, institutional investors and large retail players have been able to track bitcoin’s market price without directly acquiring the digital currency. The market dynamics stemming from this turn of events have resulted in a dramatic price increase, with returns since the ETF launch at around 30 percent at present. The halving’s impact on supply, moreover, should usher in further bullishness, if previous halving events provide any guidance for future performance.

Perhaps this bullish outlook is why El Salvador, under President Nayib Bukele, remains so defiant about retaining and even expanding its bitcoin holdings. Bitcoin has functioned as legal tender in El Salvador since September 2021, when the Central American nation became the world’s first to purchase the cryptocurrency as a treasury asset.

Bukele’s resounding re-election victory in early February only further affirms the Central American country’s support for bitcoin adoption, with the cryptocurrency set to remain as legal tender during his second term, despite the International Monetary Fund’s (IMF’s) request for him to “reconsider” this policy during recent loan negotiations. Indeed, El Salvador’s vice president, Félix Ulloa, confirmed that the government has no intention of reversing course and that the SEC’s approval of spot bitcoin ETFs only strengthened the government’s commitment to bitcoin. “Not only will it (the law) be maintained,” Ulloa said in an interview with Reuters on January 31. “At this moment, it enjoys the greatest credibility in the entire world.”

Nayibtracker.com, an unofficial website that indexes El Salvador’s bitcoin purchases by analysing the purchase data disclosed in Bukele’s tweets, has calculated the value of the country’s bitcoin portfolio at more than $375 million. “When Bitcoin’s market price was low, they wrote literally thousands of articles about our supposed losses,” Bukele posted on X on February 28. “Now that Bitcoin’s market price is way up, if we were to sell, we would make a profit of over 40%.”

And with the halving now complete, El Salvador may want to continue holding onto its bitcoin acquisitions, especially given the upbeat outlook for the digital currency’s price that is now pervading the market. According to Noelle Acheson, host of CoinDesk’sMarkets Daily podcast and author of the Crypto is Macro Now newsletter on Substack, a similar post-halving run similar to the previous cycle could see bitcoin reach $450,000 one year later, or $270,000 if this cycle is more reminiscent of 2016, using Bloomberg’s data. “Or, if we apply the low-to-high patterns [using Axios data], then BTC could reach $350,000 (using the previous cycle as a guide), or $1.8 million (applying the 2016 cycle performance),” Acheson noted in an April 13 article. “Either way, it seems clear that the bias is to the upside.”

By recording bullish and bearish option contract positions for expiry on June 28, moreover, Basedmoney.io noted on April 22 that a hefty $540 million had been amassed in options traders’ bets that bitcoin’s price will continue to rise over the next couple of months. That said, the exact timing of the rally is yet to be determined.

Not everyone is as optimistic in their price assessments, however. “All else equal, the halving will cut industry revenues in half, triggering a wave of consolidation and business closures, while (hopefully) rationalizing the network hash rate [the computational power required to process transactions on the bitcoin network] and industry capex, which is ultimately good for the remaining operators,” J.P. Morgan analyst Reginald Smith wrote in a recent note to investors.

″[The] Bitcoin halving is already partially priced in by the market, and we do not expect prices to increase significantly following the halving event,” Deutsche Bank’s Marion Laboure noted recently, adding that it “has been widely anticipated in advance due to the nature of the Bitcoin algorithm”.

Nonetheless, gaining exposure to bitcoin and other cryptocurrencies has never been easier, especially since the SEC’s approval of spot bitcoin ETFs, which can be ideal for investors who do not want to acquire the digital currency directly. Instead, investing in a spot bitcoin ETF is akin to buying shares in a fund or security, with the ETF comprising the BTC stored in a vault and managed by the issuing company; it is ultimately designed to track the underlying bitcoin price.

Investors can also buy bitcoin directly from exchanges or other issuing platforms. Because this method requires investors to own and store their BTC directly, however, it is important to understand more about bitcoin and the wider crypto market than it is with spot bitcoin ETFs. Important matters such as which exchange(s) to use, how to safeguard acquired BTC securely and which custodian is the most appropriate ought to be considered by investors before making a purchase.

 

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1 comment

John Granat April 28, 2024 - 3:09 am

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