The Anticipated Approval
This week, the SEC is expected to give their decision on a proposed spot bitcoin ETF and, according to some analysts, approval is just about guaranteed. Crypto traders have believed that for some time, resulting in big gains in BTC/USD in the last couple of months of last year taking bitcoin (BTC) up to around $45k. That has had one interesting effect: The people who said, once again, that BTC was going to zero earlier last year when it had dropped to around $20k have disappeared for some reason, just as they have every time it has jumped.
You would think after being so wrong so many times, these bears would have learned that BTC is here to stay, but it seems not. Ironically, now that the permabears are in hiding, this might actually be a good time to be at least somewhat bearish.
The Potential Impact
It is not that a spot ETF won’t have a positive impact on demand for bitcoin. It obviously will, given that the fund will have to own the asset to back it, but the massive gains in BTC/USD that we have seen look overdone, and a “buy the rumor, sell the fact” pattern shortly after the approval is announced this week is starting to look very likely. It is funny how a reversal in direction in any market for any reason can be an “Emperor has no clothes!” moment for traders and investors, so if a post-announcement drop does come, it could easily prompt a rethink about the beliefs underpinning the run up.
The problem is that the doubling in BTC/USD rests largely on one major, but possibly flawed assumption: that it will result in a big increase in institutional investment in bitcoin. However, there are reasons to doubt that.
First, unlike when I first started writing about bitcoin in 2014, ownership of crypto is now not a fringe thing limited only to a few computer nerds and some like me who just found the idea of a trustless, peer to peer, currency a fascinating concept. Nor is it still something that requires jumping through some pretty daunting, and to be honest, shady hoops to achieve these days. Accessible wallets and exchanges are commonplace, making bitcoin no more difficult to own and trade than other, more conventional currencies.
Major U.S. institutions have therefore been involved in trading and owning crypto for a few years now, leaving no reason why an ETF will prompt a huge jump in institutional ownership. That is especially true given the other factor that seems to be being overlooked.
Institutional Investment and Fees
One of the things that I have observed in my forty years or so in and around markets is that every institutional trader understands the cumulative negative impact of fees on an investment. They are happy to charge them to retail investors like you and me, but will go out of their way to avoid paying them themselves. So, even though Grayscale announced that they were reducing their proposed annual management fee on the fund to 1.5% from 2%, that is still a significant convenience charge for institutions that could set up their own bitcoin trading and storage account without that much more fuss.
The Market Sentiment
None of this means that BTC/USD won’t greet the news with a pop, assuming the SEC does what everyone expects and approves the ETF this week. It almost certainly will pop, but the question is how long that bullish sentiment will last. If profit taking prompts a post-news dip before long, that could easily turn into a significant correction as the assumptions behind the 100% or so gains in BTC start to be questioned.
Then there is the fact that crypto has become such a polarizing thing in the investment world. It is a love it or hate it thing. Those that love it almost certainly already own it, and those that hate it probably never will. It seems unlikely that there is a big pool of money controlled by people without an opinion that will suddenly be invested in crypto just because there is a spot ETF available.
Potential Opportunity for Long-Term Investors
There is one other thing worth saying here, though. If there is a drop in BTC/USD on a “buy the rumor, sell the fact” effect following the news this week, it will set up an opportunity for longer-term investors, as the second thing that has been driving recent buying will have a positive impact. Bitcoin’s original white paper created regular “halving” events, where mining becomes exponentially more difficult at certain points, restricting supply. We have seen in the past that those events do give the price of bitcoin a sustained boost, and one is expected in April of this year.
I am not a hater who sees every move up in bitcoin as a movement led by a confederacy of dunces, but nor am I a fanatical libertarian anarchist who believes in it as a way of challenging the very idea of government. I don’t believe that the asset is inevitably headed to a million dollars, nor do I believe it is worthless and headed to zero. I am just an everyday trader and investor who believes that the democratization of money is potentially a good thing, and for whom the potential to make money is paramount. That allows me to see that bitcoin is probably overvalued at current levels and take a bearish view over the next few weeks, but still see the long-term bullish influences that will see it recover to at least these levels, or probably even higher, by the middle of the year.