Detail of an illustration referring to bitcoin on a wall in Kiev in 2018. (Credit: L'Orient-Le Jour archives)
During the first half of May, staying vigilant was crucial for investors eyeing cryptocurrencies and Exchange-Traded Funds (ETFs). This period saw the Securities and Exchange Commission (SEC), the US financial regulator, authorizing the first category of financial investments based on Bitcoin since January.
The price of Bitcoin, which had weathered the halving shock (the process of reducing inflation in this cryptocurrency) fairly well between April 19 and 20, reached its lowest level since February on May 1, falling below the $58,000 mark — $15,000 less than the April peak.
Following this 24-hour slump, the price has since vaguely recovered, fluctuating between $65,000 and $60,000, according to various platforms tracking this cryptocurrency.
Ether, the second-largest cryptocurrency in capitalization, followed a fairly similar pattern from April 29 (over $3,200) to May 3 (under $3,000), with a less pronounced rebound toward the end.
The Bitcoin Spot ETF market, which had been relatively stable since the first assets were marketed, also experienced a rather tumultuous sequence. On May 2, there was a notable outflow of $563 million in a single day, as reported by specialist sites such as Coin Tribune and Coin Desk.
However, two days later, there was an opposed performance, with investors injecting $378 million into ETFs, causing significant market fluctuations and forcing analysts to consider various possibilities.
ETFs, Bitcoin and soon Ethereum?
ETFs are financial investments provided by funds that utilize their own capital or entrusted funds to invest in securities mirroring the performance of a pre-selected index, whether it’s the stock market or another. They provide a means of investing in the stock market without being solely exposed to the risks associated with a limited number of listed companies.
Since Jan. 10, the US SEC has authorized several categories of ETFs backed by Bitcoin, the leading cryptocurrency known for its decentralized nature. This move marked a significant milestone that has attracted numerous institutional players.
“In practical terms, ETFs enable investors — whether individuals, investment banks, or others — to invest in Bitcoin without the need for direct trading or acquisition of a dedicated digital wallet for buying and selling, allowing them to intervene directly in the market,” explained Rudy Fares, a cryptocurrency expert. However, he noted that investors should be aware of the management fees charged by the operator as a potential downside.
“The Bitcoin curve is mirrored symmetrically and without interference in the curve of Bitcoin-backed ETFs. Therefore, every dollar invested will track the price of the cryptocurrency. It’s a passive product,” said Phil Bekhazi, an expert on cryptocurrency for 10 years and CEO of XBTO. He highlighted that certain managers, like XBTO, concentrate on more “active” products. These actively managed funds capitalize on market fluctuations, both upward and downward, generating a margin on the variation.
Fares noted that ETFs backed by other cryptocurrencies are either in development or have already been introduced. While the SEC in the United States has yet to approve Ethereum ETFs for marketing, several companies are already offering this type of asset on the US market. Hong Kong initiated its own ETFs based on Bitcoin and ether on April 30, but their performance has been modest thus far.
What moved the market?
Looking beyond individual movements, notably the surprise fundraising of asset manager Grayscale totaling $63 million on May 4, Bekhazi believes that the recent sequence is due to a combination of two broader factors.
The first factor is the historical pattern observed after each halving, which typically entails a subsequent rebound period spread over time.
Halving is an inherent process in the Bitcoin algorithm, initiated in 2009, aimed at reducing the inflation of this cryptocurrency every four years by halving the number of available units and the reward obtained by each mined block, which comprises Bitcoin transactions attached to metadata.
“It’s natural for cryptocurrencies to experience periods of consolidation. A correction of around 20 percent following the strong performance Bitcoin had before climbing above $73,000 in the weeks leading up to the halving is quite normal,” he explained.
In fact, even with this correction, Bitcoin is currently trading 44 percent higher than it was a year ago and more than 66 percent higher than it did six months ago, according to data from tradingview.com.
“The reality is that Bitcoin has seen gains of thousands of percent since its inception,” Bekhazi said. “Those interested in investing in cryptocurrencies simply need to have a relatively long investment horizon, longer than six months.”
But the surge was also bolstered by cyclical factors. “On Friday, the economic data that was released suggested that the US Federal Reserve might be stuck with a monetary policy that favors cutting key interest rates,” said Bekhazi.
In early May, on Wednesday, the Fed kept its interest rates unchanged at between 5.25 percent and 5.50 percent, a range within which they have been fluctuating since July, while some of its officials are pushing for a cut that the markets are expecting in September.
“This emerging trend is impacting investors, who are increasingly favoring ‘risk-on assets’ — assets with a high level of risk, such as shares on the stock market, which offer higher returns compared to safe havens or safer but less lucrative investments [risk-off assets],” said Bekhazi, co-founder of XBTO.
“The interesting aspect of Bitcoin is that investors perceive it as a risk-off asset — confirmed by its long-term growth curve — yet in the short term, it behaves like a risk-on asset, exhibiting erratic fluctuations,” he added. “This parallels the behavior of corporate equities.”
What to expect and what to fear
While it is generally accepted that understanding the past makes it easier to predict the future, the cryptocurrency market today must consider several factors likely to alter the habits of its enthusiasts.
One indication of the market’s evolution lies in the changes in the pace of cryptocurrency fluctuation cycles before and after halving.
In an article published on May 8, Coin Tribune highlighted that a peak occurred just before the halving, and the following market corrections were less pronounced.
The first, and arguably the most significant factor at the moment, is the development of ETFs in the US, a financial market that typically sets the pace for the rest of the world. This development will make Bitcoin more vulnerable to the maneuvers of large investors.
“The advantage of ETFs is that they reinforce the legitimacy of the cryptocurrencies they are based on, extending beyond the communities that facilitated their development. They also drive up demand and prices,” Fares explained.
“But it’s a double-edged sword because every major player will have the ability to shake up prices by withdrawing their investments, which will make prices more volatile,” he added.
He also highlighted a certain crack in the enthusiasm for ETFs. While the difficult start-up of these assets in Hong Kong does not allow us to draw any conclusions at the moment, Grayscale’s recent decision to abandon its application to the SEC for authorization to launch Ethereum futures contracts raises questions.
On the macroeconomic front, however, the stage seems to be set for ETFs to expand in 2024 or even 2025. In its April forecasts, the International Monetary Fund (IMF) expected global inflation to fall from 6.8 percent in 2023 to 5.9 percent in 2024, and then to 4.5 percent in 2025, which should encourage central banks to lower interest rates, boosting investment.
This article was originally published in L'Orient-Le Jour. Translated by Sahar Ghoussoub.
