A year ago, Bitcoin’s price hovered around the $30,000 mark. While the first half of 2021 saw a gradual increase up to an all-time high of over $64,000 in April, it sold off heavily in June and July, dipping below $30,000. Since then, however, Bitcoin’s price has been soaring to new highs above $65,000 in November 2021 just to consolidate back to $45,000 where we are right now. What caused this immense Bitcoin volatility, and what will happen next?
The Debut of the First Bitcoin ETF
After eight years of rejecting proposed Bitcoin ETFs, the Securities and Exchange Commission approved the ProShares Bitcoin Strategy ETF (Nasdaq: BITO) in October. The much-anticipated ETF started trading on the New York Stock Exchange and was warmly welcomed by the public.
The ETF hauled in $570 million of assets on the first trading day. The day after the launch, Bitcoin rallied to a record high, reflecting the booming investor interest in the asset class.
The market’s reaction was positive because the approval marked a significant milestone for the industry. But the approved exchange-traded fund is not only beneficial to investors. ETFs are also cost-effective for day trading crypto assets. Instead of paying high transaction costs for Bitcoin transactions using a crypto exchange, day traders can now day trade the first Bitcoin-related ETF with zero commissions using their favorite online broker.
Furthermore, the approval of the ProShares Bitcoin Strategy ETF opened the floodgates for new filings. Bitcoin ETFs from other issuers are expected to debut later this and next year.
Stock Market Gains
The stock market has enjoyed a steady growth in the period post-mid-July. The S&P 500 and DJIA reached record-breaking levels in December, and technology stocks like Apple and Nvidia drove the Nasdaq to a new record high.
So, how is this relevant to Bitcoin? There is the widespread belief that Bitcoin is a safe-haven asset, similar to gold. However, the market history and the fundamental economic reasoning have given us plenty of proof on why this isn’t necessarily the case, at least as of now.
Today, we have more means to believe that Bitcoin has a positive rather than negative correlation to the stock market. The latest example of this was when Bitcoin peaked in October and again in November alongside the stock market. In the past, the digital asset’s price had tanked along with the stock market several times. As a result, some analysts describe the asset as “a hybrid somewhere between a commodity and a currency.”
Institutional Interest and Favorable Regulatory Approach
Regulators are warming to the idea of easing the crypto industry in its quest to attract more institutional interest. In the last couple of months, we have seen governments and regulatory authorities worldwide become more comfortable with crypto-backed products. One such example is the decision by the US Securities and Exchange Commission not to block the ProShares ETF or the fact that chief officials in the US opted not to ban cryptocurrencies.
This has positively affected the price of Bitcoin, opposite to the pullback we saw earlier this year due to fears about more stringent regulation.
The growing price momentum, paired with regulators’ more favorable approach, has attracted increased institutional interest in the niche. This is evident also from the increasing basis spreads on the CME, the only crypto derivatives exchange with federal oversight and a preferred marketplace by institutional investors.
This is well explained by the fact that institutional investors usually move as a herd and are momentum chasers. The reason is rooted in the highly-competitive asset management niche where no company wants to lag behind its peers in terms of investment. And when the crypto market is offering such lucrative returns, institutional investors can’t afford to miss joining the momentum.
Growing Acceptance Across Emerging Markets
In the crypto world, there has long been a division between developed markets and developing markets. While jurisdictions like the US and the EU are still looking towards crypto projects with a bit of suspicion and are often issuing stark warnings about their risks, emerging markets are much more welcoming and crypto-friendly.
Bitcoin and other digital assets are already building deeper roots in markets with a history of financial instabilities or existing barriers to traditional financial products.
Today, there is a massive crypto footprint and entrepreneurial opportunity across countries like Vietnam, Nigeria, Venezuela, Brazil, and more. Countries like El Salvador have gone even further by adopting Bitcoin as an official currency, although this particular event didn’t lead to Bitcoin price gains.
While this factor might not be as influencing as the previous ones, it has a fair share of importance in the overall landscape that has empowered recent Bitcoin price gains.
According to some analysts, the price of Bitcoin has reacted positively also due to the dynamic fiscal and monetary policies in the last months. A significant example is the talk about raising the debt ceiling in the US. Alternatively – granting more freedom to the Fed to buy federal bonds and increase the debt.
Similar fiscal and monetary policies are often considered irresponsible by the market and undermine the concept of fiat money. However, they positively affect the growth of the digital asset industry since crypto is a direct response to irresponsible Fiat currency management.
Another factor leading to Bitcoin’s positive price trend is the growing global momentum for more explicit regulatory policies, especially within the US. Almost all major regulatory agencies recognize the need to create a new regulatory regime around digital assets. Currently, regulatory uncertainty remains the number one obstacle preventing financial advisors from allocating resources to crypto. If addressed, it will unleash mass-market growth and a potential mainstream crypto adoption.
In a nutshell, the rise in the Bitcoin price isn’t a consequence of a single factor, be it regulatory developments or the growing acceptance of digital assets across Wall Street.
Instead, the positive market momentum stems from a multitude of factors that collectively instilled a general positive feeling across the industry. The combination of those factors and the fact that they perfectly complement each other further exacerbated the bullish effect on the market.
Whether the set of events will continue to favor the crypto market remains to be seen. To predict where the market will go next, it is important to look beyond numbers to analyze the underlying shifts. It is their effect that will shape the market for the long term.