How Has the Bitcoin Spot ETF Impacted BTC?

How Has the Bitcoin Spot ETF Impacted BTC?

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The approval of 11 Bitcoin Spot ETFs marked a historic moment for the crypto industry. The US Securities and Exchange Commission (SEC) signed off on approving 11 US Bitcoin Spot ETFs on 10 January 2024, opening another door to the world’s oldest (and largest, by market capitalisation) digital asset for both retail and institutional investors.

An ETF is an acronym for Exchange-Traded Fund, providing investors with a passive investment vehicle option. ETFs are generally passively managed funds, though there exists active asset management, too. A passive ETF attempts to replicate the performance of an index, such as stock market indices like the S&P 500 or Nasdaq 100 (think about the SPDR S&P 500 ETF [SPY] and the Invesco QQQ Trust ETF [QQQ] or the Invesco NASDAQ 100 ETF [QQQM]), as well as track the performance of major asset classes, like currencies and commodities (think gold ETFs: SPDR Gold Shares [GLD]). Active management requires more involvement from the team to attempt to beat the market—to generate alpha over a preselected benchmark.

ETFs are traded in the same way shares are traded on a stock exchange and, as briefly highlighted above, offer investors exposure to a wide selection of markets, including stocks, indices, currencies and commodities, to name a few. Importantly, the ETF fund will either buy physical assets it is tracking, as the newly approved Bitcoin Spot ETFs do or instead invest funds through the derivatives market (these are known as synthetic ETFs). This means the shares of the Bitcoin Spot ETFs track the price movement of Bitcoin’s spot price.

The day following the approval of the Spot Bitcoin ETF, the price of BTC/USD spiked just above $49,000, though the gains were short-lived. Following a correction to a low of $38,506 on 23 January, BTC/USD bulls have been outperforming. Against the US dollar, we have seen the price of BTC/USD rally more than 20.0% this month and is currently trading at highs of $52,868, levels not seen since late December 2021.

What’s Behind the BTC Rally?

The BTC advance is largely due to the increased flow of capital into the newly approved Bitcoin Spot ETFs. According to data from CoinShares, since the launch of the Bitcoin Spot ETFs, capital inflows have increased by approximately US$2.8 billion. Demand has not only propped up the price of Bitcoin, but additional altcoins (or digital currencies) in the crypto market have also increased in value. The price of Ethereum (Ether) versus the US dollar (or ETH/USD) is higher by more than 20.0% in February!

Increased optimism for risk assets also came about on the back of expectations that the US Federal Reserve (the Fed) will begin policy easing this year. Although we have seen expectations move further out into the year, the market (the Fed) projects four rate cuts (three rate cuts) that will take place by the year's end. 

Will the Rally Continue?

This is the million-dollar question.

No one truly knows whether bulls have enough gas in the tank to continue pushing things higher, and some forecast an overheated market and potential profit-taking.

On one side of the crypto fence, BTC advocates—those who believe in its long-term value—support further upside in the BTC price, while sceptics stand prepared to sell any negative news. One thing is for sure: volatility is elevated for the BTC/USD pairing and is likely to remain so for the foreseeable future. Based on the FP Markets Research Team, the overall trend for BTC/USD has been higher since late 2022. However, for further buying to be seen, this would involve clearing current offers around long-term resistance at $51,952. Should price make it beyond here, buyers are likely to remain in control as long-term resistance is not seen until $56,796. 

Another thing to bear in mind is that the large majority of traders and investors focus solely on technical analysis, while mention of any form of fundamental analysis tends to be directed more towards a microeconomic structure: the demand for cryptocurrency. Assets like Bitcoin, as well as precious metals, such as gold and silver, lack conventional cash flows, requiring alternative valuation methods compared to traditional securities. This usually involves regulatory developments, technological advancements and the macroeconomic situation.