The Securities and Exchange Commission (SEC) made a landmark declaration by endorsing 11 spot Bitcoin ETF applications. This momentous decision marked the end of a prolonged stalemate between the SEC and fund managers, signifying a triumph for the cryptocurrency industry. The SEC, referencing the previous year’s court ruling that the refusal of spot ETFs was inconsistent with the approval of futures-based ETFs, clarified that this was not an endorsement of cryptocurrency, considering the numerous inherent risks. The approval drew mixed reactions, with Bitcoin’s performance lagging behind Ethereum’s, even though the overall cryptocurrency market has experienced a rally. It draws parallels to the commodity price actions around the first gold ETF launch. Despite the groundbreaking approval, questions remain about ETFs for other cryptocurrencies. It is crucial to analyze what this approval implies for Bitcoin inflows and its potential role in portfolios. This approval opens doors to a massive potential market.

SEC officially grants spot Bitcoin ETF approval following strong rally in Q4’23

Surge in Trading Post-Approval

The SEC’s approval saw the launch of 11 spot Bitcoin ETFs, with trading kicking off immediately. The first day alone witnessed trading over $2bn. The anticipation of the decision resulted in increased futures and spot volumes of Bitcoin, alongside a surge in exchange-traded product inflows. It highlights the market’s eagerness, with Bitcoin underperforming yet rallying overall. The cryptocurrency market awaits the introduction of ETFs for other cryptocurrencies in bated breath.

Bitcoin volumes are clearly trending higher vs. Q3’23, but remain below 2021–2022 averages

Crypto Allocation: Asset Managers Rapidly Buying BTC for Portfolio

Post-approval, the potential inclusion of Bitcoin in portfolios is set to become more prominent. However, widespread inclusion in portfolios is still a distant reality. The ETF approval facilitates the usage of Bitcoin by larger financial institutions. Still, more widespread adoption is necessary for this emergent technology to fully mature. Anticipation surrounds the launch of centralized investment vehicles for decentralized assets. As the crypto market continues to develop, it will likely 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, the widespread inclusion of Bitcoin in portfolios is still a while away. While the approval enlarges the potential market for Bitcoin, wholesale rush into the asset class is unlikely. Financial advisors need to conduct extensive due diligence on ETF vehicles and crypto as an asset class. Bitcoin’s cyclicality, its tendency to benefit from higher equities and a weaker USD (lower rates), also diminishes the “digital gold” narrative. The adoption and usage of Bitcoin and its integration with traditional financial services will continue to be a focal point. The most practical aspect of the industry, in our view, remains the underlying use-cases of blockchain technology.

2024 Outlook: Bullish on ETH

Resembling the initial gold ETF launch, BTC has underperformed ETH, though crypto is performing well overall. In the first week of the new year, crypto sold off substantially following the publication of a research report citing reasons that the SEC would be unlikely to approve spot ETFs (see Figure 6). In what many view as a “classic” string of crypto events, the next market-driving news story came from the SEC’s account on X (formerly Twitter), which posted that the Commission had granted spot ETF approval.

However, SEC personnel quickly came out and refuted the story, stating that the Commission’s account had been compromised, only to come out less than 24 hours later and affirm the message in the hacker’s posting. In the couple days since the original “erroneous” post, crypto has rallied, though Bitcoin has significantly underperformed Ethereum.

Crypto price action similar to precious metals near launch of gold ETF

This price action is analogous to that of precious metals near the launch of the first gold ETF back in 2004 — though the latter was on a longer time scale — which we had drawn comparisons to here (also see Figure 7). In our view, the crypto market has already moved to the next narrative, with ETH rallying more than BTC, likely on the expectation that crypto’s second largest token could also see an ETF approval. Accordingly, we will be keeping a close eye on the progression of ETH flows, along with those of large altcoins, relative to BTC in the near-term, and will dig deeper into the new ETF flows and liquidity in our bi-weekly once the dust has started to settle.

2024 Macro Outlook: Economic Tailwind for BTC

Tech Stocks Profit Taking: A Golden Start

The year commences with tech stockholders realizing profits, having delayed sales until 2024 to circumvent capital gains tax incurred in 2023. This trend was visible in the portfolio trades handled by our team.

NASDAQ Bounced off October-23 lows

Positive Economic Data: Neutral for Fed Rate Hike

Last week witnessed an influx of data, telling a positive story for the market. The economy is moving ahead at a steady, “Goldilocks” pace, neither too strong to nudge the Federal Reserve (Fed) for tightened policies nor too weak to trigger a profits slowdown. Amid strong jobless claims and favorable labor market reports, the signs of economic growth are encouraging. Despite reported positive outcomes, the actual impact was slightly offset by a slight drop in hours worked, implying an overall decline in total hours worked.

Market Reactions and Inflation

The market reacted to the slightly higher than expected average hourly earnings, leading to an initial bonds selloff. Rising wages are often misconstrued as indicative of inflation. In reality, the gap between wages and inflation represents productivity growth, which has been exceptionally robust. Anticipated inflationary pressures are likely to be influenced by conflicts in the Middle East and potential impacts on cargo ships passing through the Red Sea. Despite these concerns, there is minor impact outside the oil industry, with other commodities remaining stable or declining. The release of Consumer Price Index (CPI) and Producer Price Index (PPI) reports last week shows that inflation is mostly in-line with expectations — and we’re seeing signs of cooling down.

US CPI

Interest Rate Cuts and Continued Growth

The focus ahead is on Fed policy regarding rate cuts. The December Federal Open Market Committee (FOMC) meeting highlighted Chairman Powell’s flexibility toward rate cuts in case of economic weakness. If real economic growth stays strong, the Fed could maintain rates, leading to robust equity markets. There’s lower probability of recession and higher chances of continued growth or a softer landing due to Powell’s flexibility.

Market Prospects and Bitcoin Advantages

For 2024, the S&P 500 is projected to have an 8–10% price gain, with smaller-cap value stocks expected to appreciate around 15%. Long-term prospects for the bond market beyond 2024 point to settling the Fed funds rate around 3% — 3.5% with a positive 50–75 basis points term premium.

SPX

Combining the above market trends with the potential benefits of Bitcoin, the cryptocurrency could see significant appreciation. Economic growth could drive an increase in the use and value of Bitcoin as more businesses and individuals adopt it for transactions. In addition to being an independent asset, Bitcoin’s potential as an alternative to traditional fiat currency can also greatly benefit from continued economic growth. As education and awareness regarding Bitcoin improve, so too does its acceptance and potential to contribute to economic growth in a meaningful way. As more adopt and use Bitcoin, the digital currency’s value is set to appreciate further, leading to more widespread use and greater integration into the mainstream economic market. Therefore, the combined scenario of robust economic growth and increasing Bitcoin adoption creates a favorable environment for the appreciation of Bitcoin.

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