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Crypto rally “overdone” or just getting started?

Wed, 11/15/2023 - 13:46

A horrible couple of years for crypto left HODLers covering their eyes and counting their losses. Over a protracted thirteen-month decline, the flagship digital currency, Bitcoin, plummeted almost 75%, and it seemed as if there was no bottom in sight. Thankfully, from the start of this year, things have been looking up. In fact, BTC has managed to post gains of 118% since January, and it would now appear that the bulls could be back on the run at last. 

As always, the factors behind this growth are numerous, but an undoubtable driver over recent months has been the buzz surrounding the potential impending approval of a raft of spot Bitcoin ETFs by the US Securities and Exchange Commission. After kicking the can down the road for almost the entirety of its permitted 240-day comment period, the SEC is finally expected to greenlight the first of the 10 ETF applications currently under review by 17 November or, at the very latest, in January 2024.

And while the excitement around spot ETFs has played a huge role in BTC's fortunes this year, the effect of similar products on altcoins has been much more muted. It's worth remembering that ETH has already had its own spot ETF approved, and yet this coin has barely managed half the YTD gains of BTC. This is because altcoin investors are typically more savvy and are led more by functionality than transient positive news factors. 

That said, the week starting 13 November did see XRP go through a sharp rise (+10%) and similarly steep correction (-9%) following the circulation of a fake Ripple spot ETF filing purportedly by Blackrock, which was subsequently later outed as a forgery. However, as we head into the final few weeks of 2023, investors and traders everywhere are wondering whether a fresh crypto boom is on the cards.

Slow and steady

The first thing to note about this latest bull market is that it's much more controlled this time around. Instead of an over 500% increase in price over six months like the one seen in 2020/21, this cycle has taken almost double the time to record a 118% gain. And while many love huge returns, the volatility and uncertainty that came with Bitcoin's previous booms and subsequent busts made it a very tricky space to invest in for the long term. The hope is that this more reasonable pace will allow the uptrend to persist much longer, especially in the wider positive market context.

Spot Bitcoin ETFs, for example, are just on the horizon, with approval of up to 10 such products expected in Q1 2024. It's hard to imagine a scenario where this doesn't result in an increase in BTC's price, as the investment firms offering such ETFs will be required to purchase large amounts of Bitcoin to back these instruments. This effect will then be amplified by the subsequent influx of institutional investment via these new, easy-to-use vehicles. If this wasn't enough, we then also have the next BTC halving to look forward to in April next year.

Historically, Bitcoin prices have rallied following previous halvings. Six months after the first halving in 2012, BTC's price shot up to $126 from $12. Then, after the second halving in 2016, it rose from $654 to $1000 within seven months. And following the last one in 2020, Bitcoin's price more than doubled to reach $18,040 from $8,570. With only 2 million coins out of a possible total of 21 million remaining, it's surely going to be a bloodbath on the mining market once the rewards drop their next 50% to 3.125 BTC per block, but this is only good news for the long-term price.

Maybe it's all priced in?

With an asset class like crypto, anchoring is always an issue. It's hard to see Bitcoin's current YTD gains as anything less than the tip of the next bullish iceberg, given the history of price dynamics in this notoriously volatile space. However, despite BTC's fairly recent highs, a gain of almost 120% in less than a year is pretty good going in any situation.

In a research report last week, JPMorgan gave its reasoned rebuttal of the two arguments suggesting significant growth ahead, namely the SEC's spot ETF approvals and impending halving. Firstly, the investment bank's analysts believe that capital will likely just be moved into the newly approved spot ETFs from existing BTC products such as the Grayscale Bitcoin Trust (GBTC), futures ETFs, and listed mining companies, thus not having any meaningful impact on real BTC demand. In short, it believes the crypto rally is "overdone". The lead author of the JPMorgan report, Nikolaos Panigirtzoglou, similarly noted that such ETFs already exist in Canada and Europe and have gained "little interest from investors since their inception".

Another argument is that this decision, coupled with Ripple and Grayscale's recent court victories, will force lawmakers to change their stance. However, Panigirtzoglou deemed this unlikely, given the freshness of the memory of the FTX scandal. He also believes that the halving is already priced in for the most part, citing this as the main reason for the recent upward motion and suggesting that any further growth will require new, organic drivers.

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