Bitcoin’s Revved Up And Three Things Are Driving The Rally

Bitcoin’s Revved Up And Three Things Are Driving The Rally
Theodora Lee Joseph, CFA

3 months ago6 mins

  • Bitcoin’s recent rally can be attributed to three factors: expectations that central banks are done with rate hikes, an anticipated approval of spot bitcoin ETFs, and the next bitcoin halving.

  • But bitcoin rallies have a way of fizzling out, and it’s anyone’s guess when that might happen. It’s worth noting that markets aren’t dumb; they tend to peak or bottom before an actual event.

  • The big macro picture tends to have a stronger impact on bitcoin’s price moves than individual micro events, so what the Fed does with interest rates will likely drive the coin’s price, at least for a while.

Bitcoin’s recent rally can be attributed to three factors: expectations that central banks are done with rate hikes, an anticipated approval of spot bitcoin ETFs, and the next bitcoin halving.

But bitcoin rallies have a way of fizzling out, and it’s anyone’s guess when that might happen. It’s worth noting that markets aren’t dumb; they tend to peak or bottom before an actual event.

The big macro picture tends to have a stronger impact on bitcoin’s price moves than individual micro events, so what the Fed does with interest rates will likely drive the coin’s price, at least for a while.

Bitcoin definitely knows how to make some noise. It’s up by more than 163% this year, climbing almost 60% in the past six weeks alone. That boisterous rally, which has overshadowed other investments like stocks, bonds, and gold has got investors feeling rowdy. Whether you’re a fan or not, it’s worth taking a minute to understand what’s driving the returns of one of the best-performing asset classes out there this year. Here’s a quick look…

Why is Bitcoin rallying now?

There have been three major factors at play. First, there’s the market’s hunch that central banks might be done with hiking interest rate hikes (and could even cut them). Second, there are rising hopes that spot bitcoin ETFs might finally gain regulatory approval early next year. And third, there’s the big bitcoin halving, which is expected to happen in April. And though this one’s a lesser driver, there’s also a sense that the worst might be behind the sector after one of the most aggressive US crackdowns in its history – one that left FTX’s Sam Bankman-Fried jailed for fraud and slapped Binance and its founder with anti-money-laundering fines.

So, if you’re wondering how much further this coin can run, you might want to take those three big factors in turn…

First, interest rates.

This is never a bad place to start: interest rates are always the elephant in the room for markets.

Right now, investors are betting that the Federal Reserve (the Fed) is at the end of its long, aggressive streak of interest rate hikes, and might soon move to cut rates. That prospect has stoked their appetite for riskier, higher-volatility assets like bitcoin and a slew of smaller cryptocurrencies like ether, and even dogecoin.

Second: the long-awaited (but still uncertain) spot bitcoin ETF.

This is something Wall Street’s big wealth management houses have been trying to get approved for years: an ETF that would give investors exposure to the cryptocurrency by simply buying shares, just as they would with a stock.

But a spot bitcoin ETF wouldn’t be entirely new. There are already bitcoin futures ETFs, which – like the proposed spot bitcoin ETFs – allow users to invest in bitcoin without directly owning it (That’s the job of the ETF provider). And that means you can do away with digital keys and the hassle of securely storing your crypto. On paper, the difference between a spot bitcoin ETF and a bitcoin futures ETF isn’t massive.

There’s no denying that the more obvious impact of a spot bitcoin ETF approval is a short-term rally in the price of bitcoin. The OG crypto shot up about 20% this summer in the weeks after BlackRock filed its spot bitcoin ETF application with US regulators. Some of that rally eventually faded, but there’s still a lot of optimism that these new ETFs might encourage fresh investment from big-money institutional investors and individual retail investors who want to gain exposure to bitcoin’s price without having to buy actual bitcoin. There’s also a sense that they’d bring more liquidity to bitcoin, making it easier for investors to trade the coin.

Not everyone is sold, though. Analysts at JPMorgan have said the potential impact of the ETF is overstated. They note that bitcoin funds haven’t drawn a ton of investor attention since 2021 and say that’s unlikely to change with the marginal difference that spot bitcoin ETFs would offer. So, they say, you could see a brief rally in anticipation of a spot bitcoin ETF approval, but it probably won’t last.

Third: the halving.

A bitcoin halving, also known as “the halvening”, occurs roughly every four years, reducing (by half) the reward for mining new bitcoin blocks. And the next halving is expected to occur in April. This process is a part of bitcoin’s monetary policy, designed to uphold the value of the crypto by decreasing the rate at which new bitcoins are created until it hits its maximum fixed total supply of 21 million coins in 2140.

You can think about it like this: Bitcoin has a total supply of 21 million coins, and over 90% of them have already been minted by miners. And at next halving, the number of new bitcoins minted per block will be cut in half for the fourth time in bitcoin’s history – meaning the coin supply, which has been increasing by 1.8% a year lately will then increase at a pace of just 0.8%. As new coin production dwindles, the laws of supply and demand suggest that the price should trend higher (everything else being equal).

In the past, the year leading up to a halving event has been a great time to accumulate bitcoin. But there’s also a psychological aspect to all this: bitcoin investors tend to get all hyped up about these events, and tend to think other investors are just as hyped, and that leads to a lot of people buying in at about the same time. Put differently, the anticipation of a halving-fueled rally helps create the rally.

So what’s the opportunity here?

Enthusiasm about where Bitcoin might head next is sky high, with predictions ranging from a short-term surge to $50,000, all the way up to an astronomical $530,000. But you may want to hold your horses rather than going full gallop down the Bitcoin stretch just now. After all, a rally without much fundamental basis can sputter just as quickly as it emerged.

Bitcoin has ridden the hype rollercoaster a lot lately, and that’s sparked a ton of optimism. But, remember, the OG cryptocurrency would still have to climb another 65% from its current value just to get back to its 2021 peak of around $69,000. Past surges have often ended in downturns, like the 64% drop last year, which followed a 60% gain in 2021. It’s anyone’s guess when this particular rally might fizzle out, but it’s important to note that markets aren’t dumb: they tend to peak or bottom before an actual event.

If anything, the economic big picture tends to hold more sway over bitcoin’s price. A key reason for Bitcoin’s robust performance in 2020 and 2021 was the huge influx of money into the system during the pandemic. Recall that Bitcoin emerged from the aftermath of the 2008-09 financial crisis, and the Fed injected nearly $9 trillion through extensive bond-buying, or “quantitative easing”, programs until April last year, stimulative moves that the market equates to “printing money”. So, with the Fed still warning about the potential for another rate increase and with that level of stimulus still nowhere in sight, you’ve probably got plenty of time to jump on the bitcoin bandwagon.

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