Monday, February 26, 2024

Bitcoin Roars Past $50,000 as Mainstream Investment Vehicles Boost Adoption

HomeCryptoBitcoin Roars Past $50,000 as Mainstream Investment Vehicles Boost Adoption

New York – The price of bitcoin surpassed $50,000 on Monday for the first time since 2021, highlighting the dramatic shift in appetite for the digital token since the launch of mainstream bitcoin investment funds earlier this year.

The flagship cryptocurrency has gained almost 15% since January 1, largely propelled by the U.S. Securities and Exchange Commission (SEC) reversing a longstanding policy to approve several spot bitcoin exchange-traded funds (ETFs). These new vehicles provide investors exposure to the price of bitcoin through a regulated product.

Major Wall Street firms like BlackRock, the world’s biggest asset manager, have offered spot bitcoin ETFs. However, despite great anticipation surrounding their launch, bitcoin’s price fell roughly 15% in the days after the SEC’s approval.

Bitcoin’s recent surge to $50,000 – more than double its value a year ago – follows evidence that the ETFs are attracting new money into the market. This represents an opportunity for bitcoin to turn a corner in the long run, analysts said.

“Following a disappointing debut of several bitcoin ETFs, we’re now seeing steady inflows into newly launched funds. I think we’re witnessing much more organic demand for bitcoin because of this,” said James Butterfill, head of research at crypto investment firm CoinShares.

After initial waves of inflows into new spot bitcoin ETFs and outflows from Grayscale Investments’ converted product, asset managers are focusing on the long-term investment case for bitcoin ETFs.

According to CoinShares data, the newly approved bitcoin ETFs have attracted roughly $3 billion in net flows, even after over $6 billion was withdrawn from Grayscale’s product since its first day of trading as an ETF.

As crypto offerings continue permeating traditional finance, issuers are optimistic that mainstream investors will eventually allocate a small portion of their portfolios to products like bitcoin ETFs alongside conventional exposure to stocks and bonds.

“I think you’ll start to see a specific allocation to that over time with a longer track record,” said Tim Huver, managing director of U.S. ETF services at Brown Brothers Harriman. “I think we’ll see increasing adoption and interest in this space.”

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“We’ve been telling clients one of the most important things is getting off zero,” added Kathy Kriskey, senior alternatives ETF strategist at Invesco, which partnered with Galaxy Digital to launch a bitcoin ETF last month. Investors could start by reallocating 1% of their equity exposure to bitcoin, she said: “I think conversations with analysts now, moving from zero to 1% is palatable.”

The crypto industry has also been buoyed by hope that it has survived its toughest regulatory punishments and scandals. In November, Binance – the world’s biggest exchange – paid a $4.3 billion fine to U.S. authorities over charges related to money laundering and violating international sanctions.

Optimism over bitcoin has further grown amid expectations that central banks will lower interest rates this year, making risk assets more enticing for investors. In April, the network underpinning bitcoin will also reduce the circulation of available bitcoins, a scheduled update that the market anticipates will buoy the flagship cryptocurrency.

However, some analysts are less convinced that bitcoin will maintain its recent upward movement.

“I’m sure the bitcoin [bulls] will say the world is waking up to bitcoin’s reality, but given the nebulous bitcoin ecosystem, it’s hard to tell who’s buying and why,” said Jim Angel, faculty affiliate at Georgetown McDonough’s Psaros Center for Financial Markets and Policy. “Bitcoin’s price will always fluctuate violently based on the number of true believers wanting to buy, and the skeptics wanting to sell,” he added.

If you monitor chatter about bitcoin’s value online, almost all of it is short-term technical analysis with almost no points about its fundamental value,” Angel said.

The Road to Mainstream Adoption

The approval of spot bitcoin ETFs in late 2021 marked a pivotal moment in the cryptocurrency’s journey towards mainstream adoption. For years, investors could only access bitcoin through futures-based ETFs or by directly purchasing and custodying the digital asset. Both carried significant drawbacks.

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Futures-based funds track bitcoin derivative contracts rather than the spot price, yielding inferior returns compared to owning the underlying cryptocurrency. Direct ownership meant assuming the risks of securely storing bitcoin private keys. Loss or theft of private keys can lead to irretrievable losses.

Spot bitcoin ETFs sidestep these challenges. They remove the need to directly handle bitcoin itself while providing returns equivalent to the cryptocurrency’s price movements. This appeals to investors unwilling or unable to deal with the operational complexities of cryptocurrencies.

“A lot of professional investors we spoke to over the years expressed interest in bitcoin and crypto but didn’t have a mechanism to invest through traditional vehicles,” said Michael Sonnenshein, CEO of Grayscale Investments. “The ETF structure provides accessibility and familiarity since it’s a wrapper that institutional investors have been investing in for decades.”

Mainstream backing has proven crucial in propelling bitcoin’s latest surge. BlackRock’s bid for a spot bitcoin ETF lent legitimacy early on, given its stature and longstanding relationship with the SEC.

“BlackRock launching a bitcoin ETF solidified that this was happening,” said Nate Geraci, president of advisory firm The ETF Store. “The world’s largest asset manager launching a bitcoin ETF erases a lot of the perceived career risk for other managers to follow suit.”

Inflows into these new products have provided a vital injection of fresh capital into the bitcoin ecosystem. As the ETFs buy more bitcoin to back their growing assets under management, increased demand pushes prices higher. It’s a self-reinforcing cycle.

“When the assets increase in the ETF, they go and buy bitcoin with the proceeds,” Geraci explained. “The ETF itself has driven some of the demand.”

Long-Term Prospects

In the short run, bitcoin’s ascent to $50,000 recovers ground lost during 2022’s slump and revives hopes of setting fresh record highs. The token remains roughly 35% off its all-time peak above $68,000 from November 2021.

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But perhaps more importantly, recent developments strengthen the investment rationale and mainstream reputation of bitcoin and cryptocurrencies for the long haul.

With household names like BlackRock, Invesco and Valkyrie now operating spot bitcoin ETFs, the stigma around crypto has faded. The asset class gained further legitimacy as exchange giants like CME Group launched micro futures contracts, providing additional hedging tools to manage risk.

“There’s a realization now that crypto and digital assets are here to stay,” Sonnenshein said. “Seeing sophisticated, regulated financial services firms enter the ecosystem establishes its longevity.”

Meanwhile, the standardization of investment vehicles should make large allocators more comfortable dipping into the crypto waters.

“You’re creating an on-ramp product for people who otherwise had hurdles to investing in digital assets,” said Ben Cruikshank, head of Flourish, MassMutual’s venture capital arm. “Wrapping it in a traditional, regulated security brings peace of mind.”

According to analysts, the SEC’s openness to spot bitcoin ETFs may encourage filings for ETFs tracking other digital assets like ether. The relaxed stance towards crypto could also smooth the path for more complex offerings.

“My belief is the SEC is trying to walk before they run,” Geraci said. “They’re approving futures-based products and physical bitcoin products first, before maybe expanding into more exotic strategies.”

As adoption spreads across individual and institutional investors, portfolio allocations to bitcoin and crypto are poised to steadily grow over time. New ETF issuances and inflows will expand the base of cryptocurrency holders.

“This is just the beginning – we’re going from niche to mainstream,” Sonnenshein said. “We’ll look back years from now and recognize these moments as the starting point for broader adoption.”

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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