Looming spot Bitcoin ETF approval gives us a bull market in crypto

There is a lot of speculation about a new bull market in cryptocurrencies, with the value of Bitcoin surging in recent weeks, for example (Figure 1). Partly, this is due to the expected approval in January 2024 of spot Bitcoin Exchange Traded Funds (ETFs) and spot ETFs for other cryptocurrencies such as Ethereum. Another factor is the halving of the rate at which new Bitcoins are mined, which will occur next year (see the CNBC report Crypto execs say the bull run is underway and could lead to $100,000 bitcoin in 2024). 

A spot Bitcoin ETF would mean investors in the ETF would effectively invest in actual BitCoin or other cryptocurrencies. Currently, investors can gain exposure to Bitcoin without buying the cryptocurrency through an investment trust such as the Grayscale Bitcoin Trust, but this is subject to the redemption rules of the trust and is not tradable on an exchange. Many market analysts see spot ETFs as a potentially significant driver of future demand for crypto and, hence, should drive prices up. Note that ‘spot’ in financial markets means immediate delivery, in contrast to a forward contract for the delivery of a commodity at a future date.   

In a mid-November 2023 interview with me on my Economics Explored podcast, crypto legal expert Professor Tonya Evans of Pennsylvania State Dickinson Law school predicted that spot Bitcoin ETFs “are likely to be approved begrudgingly by the SEC [U.S. Securities and Exchange Commission].” She predicted, “We will be entering a bull market soon.” A transcript of my conversation with Professor Evans is available here: Digital Money Demystified w/ Prof. Tonya Evans – EP216, and you can listen to it via the embedded player below. 

Professor Evans is a member of the Board of Digital Currency Group, the owner of Grayscale Investments, which has applied to the SEC to start a Bitcoin spot ETF. She wrote the new book Digital Money Demystified: Go from Cash to Crypto Safely, Legally, and Confidently. Professor Evans argues there are many myths surrounding digital assets, including their association with criminal activity and extreme volatility. In her book, she aims to dispel these myths and provide readers with a more accurate understanding of cryptocurrencies.

Professor Evans mentions companies like Chainalysis that specialise in blockchain forensics and use it to follow the money trail in criminal activities. She highlighted that Bitcoin’s transparency allows law enforcement agencies, like the U.S. Department of Justice, to root out criminal activity. Professor Evans noted in our conversation:

“ not to diminish what’s going on, we use Sam Bankman-Fried, for example, as the poster boy, but it took less time because he was apprehended in the Bahamas on November 7, in basically almost a year to the date. He’s a convicted felon, and we’re just waiting for his sentence. It took way more time to find out who was involved in the housing crisis, way more time to take down Bernie Madoff. It’s all garden variety fraud, but it happened far more quickly in the crypto space, and I don’t think that the crypto space gets enough credit for that.”

Please note that my conversation with Professor Evans occurred before the news that Binance and its CEO pleaded guilty to sanctions violations and violations of U.S. anti-money laundering laws. I did not get to ask her about that. 

Regarding the volatility of Bitcoin and other crypto, Professor Evans is hopeful that, like some other assets historically, the values of cryptocurrencies will become less volatile. In the conversation, I doubted whether the volatility would ever decline. The demand for the dollar is underpinned by its ability to settle numerous contracts throughout the economy and pay government taxes. Unless large numbers of prices are set and contracts written in Bitcoin or other cryptocurrencies, the demand for the cryptocurrencies will continue to be buffeted by large swings in sentiment, meaning highly volatile prices. Professor Evans speculated that a cryptocurrency could become the monetary standard of outer space, which is an intriguing possibility and counterpoint to my scepticism. 

This article and my podcast conversation with Professor Evans are for general information only and are not meant to be financial or investment advice. Please be careful and consider consulting a financial adviser regarding investment decisions. For most people, investing in crypto is akin to gambling on an unfamiliar sport. Unlike traditional securities such as stocks and bonds or real estate, the underlying values of the assets are much less clear. 

This article was authored by Adept Economics Director Gene Tunny and published on 4 December 2023. For further information, don’t hesitate to contact us via contact@adepteconomics.com.au or 1300 169 870.

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