Can Bitcoin ETFs trigger a big bang for cryptocurrencies?

Bitcoin was expected to explode in 2024 as two transformative events sent the price rocketing to $50,000, $100,000 or even $250,000 by the end of the year, depending on who you believed.

January was supposed to blast the cryptocurrency right into the mainstream, when the US Securities and Exchange Commission finally gave the green light to spot Bitcoin exchange-traded funds. Call it the Bitcoin big bang.

Spot Bitcoin ETFs will open the controversial asset class to a vast new pool of investors by making it easier, cheaper and safer to track the No 1 cryptocurrency’s price movements.

The second big move is the next Bitcoin block reward “halving”, due in April, when the amount paid to miners is slashed in a pre-programmed move to reduce supply and maintain its scarcity value.

Well, the first is in and has turned out to be a damp squib. After an initial sharp rise in interest on the SEC's approval, Bitcoin quickly gave up its gains.

Has hype raced ahead of reality again?

On January 10, the SEC announced the supposedly game-changing news that it was giving regulatory approval to the first spot Bitcoin ETFs in the US.

The SEC approved 11 ETFs in total, including offerings from fund management behemoths BlackRock, Fidelity, Ark, VanEck and Invesco, plus specialists including Grayscale, Bitwise and Hashdex.

Binance chief executive Richard Teng spoke for many by claiming the SEC move brings added credibility to the digital asset industry and “signals an exciting new era of adoption and legitimacy, not just for Bitcoin but also for the broader crypto space”.

Trading began last Thursday and was brisk, with $4.6 billion worth of shares traded by close of day, according to London Stock Exchange Group data.

Bitcoin soared to $48,711 on January 11, up another 15 per cent following last year’s hyper-powered 150 per cent surge. It then plunged back to about $42,000 in a classic case of “buy the rumour, sell the fact”.

Everyone knew spot Bitcoin ETFs were coming. Their arrival was priced in, as is April’s Bitcoin halving.

So much for the Bitcoin big bang. Yet, these are early days.

BlackRock claims that its iShares Bitcoin Trust (IBIT) offers investors two main advantages.

First, it allows investors to gain access to Bitcoin within a traditional broker's account. Second, it spares them the “operational burdens” associated with buying Bitcoin directly, such as “high trading costs and tax reporting complexities”.

Fund manager Ark reckons its 21Shares Bitcoin ETF (ARKB) offers investors a “tool for diversification” by allowing them to add an asset with low correlation to traditional portfolio assets.

Investors no longer have to master “arcane details of how to safely trade or store” Bitcoins, which Ark will keep in “cold storage” – secure offline environments safe from hacking and theft.

Given that a million or so Bitcoins have been lost or stolen, these are real benefits.

Charges are low, too. Ark has no initial fees and an annual management charge of 0.21 per cent. BlackRock charges slightly more at 0.25 per cent but with an initial 12-month reduction to 0.12 per cent on the first $5 billion.

What spot ETFs have not done is change Bitcoin’s speculative nature, says Laith Khalaf, head of investment analysis at UK-based fund platform AJ Bell.

He notes that in 2021, London’s Financial Conduct Authority banned the sale of exchange-traded notes offering Bitcoin exposure.

“Its argument was that crypto had no inherent value, was wildly volatile, rife with financial crime and didn’t fulfil a financial planning need. So, what’s changed? Not much.”

Sometimes you should be careful what you wish for, Mr Khalaf says.

“It’s hard to make a case that crypto fulfils a genuine financial planning need that can’t be met by other assets, but it definitely does open up investors to the possibility of very heavy losses.”

The new breed of spot Bitcoin ETFs are not available for sale in the UK and Europe, where regulators remain wary, Mr Khalaf adds.

Others are more optimistic. Lukman Otunuga, senior market analyst at online trading broker FXTM, calls the SEC move a “historic moment” that will bring in fresh inflows from retail and institutional investors.

He also rightly predicted that early price falls were likely “before investor inflows push prices higher down the road”.

Wild price fluctuations represent a huge opportunity for traders, but they will need cool heads, Mr Otunuga adds.

“They should be conscious that resistance may be around $47,000, then $50,000. Beyond this point is the all-time high just below $69,000.”

It could go the other way, too. “Should prices slip back below $37,000, this may open the doors towards $30,000 and $20,000 instead,” he cautions.

Vijay Valecha, chief investment officer at Century Financial, says Bitcoin has strong technical support around $39,000 on the downside, while warning that $48,000 still holds as a “major line of upside resistance”.

Bitcoin’s newfound respectability has done more to help smaller cryptocurrencies, with second-biggest Ether the clear winner.

While Bitcoin was trading at $42,850.09 on Tuesday morning, Ether was up almost 1 per cent at $2,532.36, driven by hopes that it will soon have a spot ETF of its own, Mr Valecha says.

“Altcoins such as XRP, Cardano, Avalanche, Polkadot, Dogecoin, Polygon, Shiba Inu and Chainlink rose between 5 per cent and 14 per cent.”

He expects more short-term volatility, but a longer-term boost as “leading institutions, including hedge funds, sovereign wealth funds and registered investment advisers” pile in.

Manuel Villegas, digital assets analyst at Julius Baer, is also accentuating the positives, citing “long-term holder accumulation, slowing miner supply growth and the upcoming block-reward halving, paired with a growing conviction that the fastest and steepest US monetary tightening cycle has ended”.

However, it will remain volatile, he warns, with a “consolidation, nevertheless, on the cards, following the steepness of the recent rally”.

Mr Villegas predicts an ETF “fee war” as fund managers slash charges to grab market share.

Giving that most spot Bitcoin ETFs do the same job, tracking the price, “fees are one of the only notable differences”.

Matthew Weller, global head of research at Forex.com and City Index, says the launch of the SPDR Gold ETF in November 2004 provides a positive parallel.

“For the first time, Americans had an easy, liquid way to invest in the precious metal and money poured in. That contributed to gold’s big rally from below $500 to nearly $2,000 over the next eight years.”

Mr Weller shrugs off the Bitcoin price pullback.

“As long as the ETFs are attracting assets, dips may be relatively limited,” he says.

Bitcoin spot ETFs have not put a rocket under cryptocurrencies and nor will the Bitcoin halving. Instead, 2024 could be a slow burner.