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HOME NRI JOURNAL Takahide Kiuchi’s View - “Three Tailwinds for Bitcoin, but Challenges Remain”


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Takahide Kiuchi’s View - “Three Tailwinds for Bitcoin, but Challenges Remain”

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

#Market Analysis

#Takahide Kiuchi

Feb. 09, 2024

The price of bitcoin, a crypto asset (virtual currency) that has had many major ups and downs in the past, is experiencing a tailwind as of late. After reaching a record high of $60,000 per bitcoin in 2021, the price had fallen to the $10,000 level by the beginning of 2023. Since then, however, it has been on a recovery trend and has been in the $40,000 range since the beginning of 2024. The driving force behind the recovery was the start of trading of spot bitcoin ETFs (exchange-traded funds) in the United States.

Bitcoin spot ETF trading off to a brisk start

On January 10, 2024, the Securities and Exchange Commission (SEC) approved 11 spot exchange traded funds (ETFs) that invest in bitcoin. Following this, on the next day, January 11, trading of the ETFs began on the three major markets: New York Stock Exchange, NASDAQ, and the CBOE (Chicago Board Options Exchange) BZX. Trading volume on the first day was brisk at $4.6 billion (670 billion yen), and $3.1 billion on the second day, for a total of $7.7 billion (1.1 trillion yen).
When U.S. ETF giant ProShares launched its first bitcoin futures ETF in 2021, total trading volume reached $1 billion in the first two days after listing, but trading volume for the spot ETFs started off much faster than that.
On the 11th, when trading of the spot ETFs began, the price of bitcoin rose from the $45,000 level of the previous day to over $49,000 for the first time since December 2021. However, it then began to decline, falling below $42,000 on the following day. In late January, the price temporarily fell below the $40,000 level, but it is now back in the $40,000 range.
Shortly after the listing of the 2021 Bitcoin Futures ETF and Coinbase Global, a major crypto exchange (exchanges), the price of bitcoin plummeted as the listing had already been priced in. The same thing happened immediately after the listing of the spot bitcoin ETFs, and the issue of bitcoin’s high volatility (price variability) has also been highlighted once again after the listing of the spot ETFs.
Incidentally, it is not possible to purchase foreign bitcoin spot ETFs in Japan at this time. Japanese investors can buy and sell various foreign ETFs through Japanese securities firms, but bitcoin spot ETFs are not included in that list at this time. Japanese securities companies need to apply to the FSA from their investment management companies to handle foreign ETFs. Going forward, the FSA will carefully consider whether to allow Japanese securities firms to handle foreign bitcoin spot ETFs, based on their merits and demerits.

Increased confidence in bitcoin transactions

The listing of a spot bitcoin ETF in the U.S. is likely to be a tailwind for the bitcoin market going forward. Until now, investors have traded spot bitcoin through crypto asset exchange service providers (exchanges), but the crypto asset (stable coin) Tether collapse in May 2022 and the failure of the major crypto asset exchange service provider FTX in November 2022 have greatly damaged the credibility of crypto asset exchange service providers. FTX’s inadequate segregation of customer assets resulted in customers losing their assets with the company’s collapse.
However, with spot bitcoin ETFs, investors can buy and sell bitcoin through brokerage accounts at SEC-regulated brokerage firms, just as they can with stocks. Even if the brokerage firm goes bankrupt, investors’ assets are protected. With the listing of the spot bitcoin ETFs, the hurdle for individual investors to start trading bitcoin in the U.S. will be considerably lowered.
Trading of bitcoin futures ETFs in the U.S. began in 2021, but there have been problems with the high cost of trading futures ETFs. With bitcoin futures ETFs, the bitcoin futures contract in which the ETF invests expires each month, and the next contract month’s futures must be purchased each time. However, reflecting the forward-looking price of bitcoin, the price of bitcoin futures has been in a state of so-called strong “contango” (junzaya), where the forward -month futures are much costlier than the near-term futures. Therefore, each time you buy a futures ETF, you are buying a forward futures contract with a higher price than the near-term futures contract, which increases the purchase cost, and this reduces the performance of your investment.
Investing in spot bitcoin ETFs does not have this problem. Therefore, the listing of spot ETFs will attract funds from U.S. retail investors, which will be a tailwind for the bitcoin market.
Furthermore, bitcoin spot ETFs have already begun to experience intense competition for lower fees, which is another factor encouraging investment. Of the 11 listed bitcoin spot ETFs, Grayscale Investments has reduced its trading fee from 2% to 1.5% based on transaction value when converting an earlier bitcoin investment fund into a bitcoin spot ETF. For BlackRock, the trading fee is just 0.12%.

Three tailwinds for the bitcoin market

The bitcoin market is currently experiencing three tailwinds. The first is the listing of the spot ETFs we have been seeing. The second is the prospect of a rate cut (policy rate cut) in the U.S. The significant rate hikes (policy rate hikes) in the U.S. that began in 2022 were a strong headwind for the crypto asset market, including bitcoin. In fact, the price of bitcoin fell by more than 60% in 2022. Crypto assets, which are volatile due to their uncertain value and do not generate cash flows such as interest payments or dividends, are less desirable when interest rates rise and investment yields on safe assets such as government bonds increase.
However, the timing of the Bitcoin spot ETF approval coinciding with the end of interest rate hikes in the U.S., which will make it easier for liquidity to return to the crypto asset market, could be a strong tailwind for the crypto asset market.
And third, Bitcoin’s halving is approaching. Bitcoin transactions generate blocks of transaction records at regular intervals on a blockchain, a distributed ledger. As a reward for the mining, new bitcoins are issued. The maximum amount of bitcoins to be issued has been set at 21 million since the beginning of the project, and the design is such that when the number of blocks reaches 210,000, the number of new bitcoins issued is halved, or a so-called halving occurs. This is designed to stabilize the value of bitcoin by limiting its supply.
There have been three halvings so far, in November 2012, July 2016, and May 2020, occurring approximately once every four years. The next halving is expected to occur around April 2024, which is expected to boost bitcoin prices through improved supply and demand. In fact, the last three halvings have seen significant price increases over the following year.

SEC strongly points out problems with crypto assets

The SEC, which approved the listing of the bitcoin spot ETF, has strongly pointed out the problems with bitcoin and other crypto assets and sounded the alarm.
In a statement released on January 10, SEC Chairperson Gensler hammered the point, saying, “bitcoin is primarily a speculative, volatile asset that‘s also used for illegal activity, including ransomware (which infects computers with viruses to demand ransom), money laundering, sanctions evasion, and terrorist financing,” and “While we approved the listing and trading of certain spot bitcoin ETF shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.” The reality is that the SEC did not want to approve the listing of spot bitcoin ETFs, but reluctantly did so after the court ruled that “the Commission failed to adequately explain its reasoning in disapproving.” Thus, going forward, the SEC is likely to continue to tighten Bitcoin regulations.
Consumer protection and investor groups have also criticized the ease of investing in bitcoin through spot ETFs, saying that this will encourage retail investors to move their money into crypto assets, which are known for their persistent fraud and rough price movements.
While there are certainly tailwinds blowing in the bitcoin market at the moment, it remains highly volatile due to its uncertain value. As an ETF, bitcoin can now be bought and sold on exchanges like any other financial instrument; however, it is still difficult to put bitcoin in the same league as other asset classes such as bonds, stocks, or commodities.
Furthermore, in terms of their function as a means of payment, crypto assets such as Bitcoin have cost advantages over existing bank transfers, but they are still issues such as being susceptible to criminal use and users’ concerns over their safety.
Going forward, the social role and value of crypto assets such as Bitcoin will continue to be debated.

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