Institutional Capital Could Fuel Crypto’s Next Bull Run
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| By Alex Benfield |
After a long pause, institutional interest finally appears to be flowing back into the crypto market. And much like the distant drum of an approaching stampede, the market can already feel the inevitable impact of the incoming wealth.
The broad crypto market is up around 16% since the June 15 lows. Currently, most major cryptocurrencies are sitting just under some incredibly important resistance levels.
But before the bulls can come charging back in full force, the entire market is waiting for one final signal: Namely, Bitcoin (BTC, "A-") needs to close and hold above its yearly high of about $31,500.
Now, the recent surge of interest in the crypto market from traditional finance firms marks a significant departure from their cautious stance during the last bull run … and it's set to impact prices in a bullish way.
Currently, six major companies are in line with applications for exchange-traded funds, some of which target spot BTC. This is a development that could potentially revolutionize the market by exposing Bitcoin to a broader investor base.
But before we dive in, allow me to quickly explain the difference between spot- and futures-based ETFs, and why spot ETFs could have a more profound impact on the market.
You see, a Bitcoin ETF is a financial instrument that tracks the value of Bitcoin. This allows investors to gain exposure to Bitcoin's price movements without actually owning the underlying asset (i.e., Bitcoin itself).
There are two primary types of Bitcoin ETFs: futures-based and spot-based.
A futures-based Bitcoin ETF doesn't buy Bitcoin directly. Instead, it buys Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a specific price on a specific future date.
Here, the value of the ETF is therefore linked to the future price of Bitcoin, not its current — or spot — price. It's worth noting that futures contracts often trade at a premium or discount to the spot price, potentially leading to discrepancies between the ETF's price and the actual price of Bitcoin.
We already have a futures-based Bitcoin ETF — the ProShares Bitcoin Strategy ETF (BITO), which began trading in October 2021.
On the other hand, a spot-based Bitcoin ETF directly buys and holds Bitcoin, and its value directly reflects the current price of Bitcoin. In essence, when an investor buys a share of a spot Bitcoin ETF, they are indirectly buying Bitcoin itself.
Overall, there are three reasons why a spot Bitcoin ETF could have a more bullish effect on the price of Bitcoin than a futures-based ETF. And these boil down to the difference in how these funds operate:
First is a spot ETF’s direct impact on demand.
When a spot Bitcoin ETF is purchased, the fund must buy actual Bitcoin to back the ETF shares. This action directly increases demand for Bitcoin, leading to potential price increases.
In contrast, a futures-based ETF does not require the purchase of actual Bitcoin, meaning it does not have the same direct impact on demand and, by extension, price.
Second is the fact that spot ETFs don’t have roll yield.
Futures contracts have an inherent issue known as “roll yield.” Since these contracts have expiration dates, a futures-based ETF must continually “roll” its holdings into new contracts as old ones expire. This process can lead to cost and performance discrepancies, especially in contango markets where futures prices are higher than spot prices.
Meanwhile, a spot ETF does not experience this issue, as it holds the actual asset. This could lead to better performance and increased investor interest, thereby potentially driving up Bitcoin’s price.
Third is the fact that a spot ETF generally has a broader appeal.
Spot Bitcoin ETFs can appeal to a broader range of investors, including those who want more straightforward exposure to Bitcoin's price or those who are uncomfortable with the complexities and risks associated with futures contracts. This increased appeal could drive more capital into Bitcoin, further supporting its price.
While it was certainly bullish when BITO started trading, that’s why many in the community have been anxiously awaiting a spot ETF ever since.
It’s also exciting to see institutional interest in a spot ETF. They’re giving this push the muscle it needs to be taken seriously by the Securities and Exchange Commission. (You can read about the latest attempt by Wall Street darling BlackRock (BLK) in my issue from last week.)
In fact, institutional backing will be key in the next push for adoption.
That’s because with big name institutions backing Bitcoin, the next bull market could come with force, and it could be approaching sooner than expected.
Bitcoin is currently trading around $30,000, which means it’s not far from the signs we are looking for before we expect the next rally upward for the market as a whole. When BTC can close and hold above $31,500, I expect the rest of the market to start to climb.
In an unprecedented move, BTC has reclaimed it’s uptrend line with a vengeance after breaking below it last week. It even broke its yearly high on June 23.
However, it failed to close above that high and hold that level.
So, right now the market is seeing significant bullish action and sentiment … but Bitcoin remains unable to convert resistance to support. And due to the unprecedented nature of this market action, we can’t say which way things will go. But given the strength Bitcoin is showing right now with this rally, I wouldn’t be surprised if it blasted through that resistance level again.
In just over a decade, the crypto market has skyrocketed to an impressive $1.1 trillion valuation, primarily fueled by retail investors and with minimal institutional participation.
Now that institutions are really getting big on Bitcoin, the stage is set for an even more dramatic expansion as institutional capital prepares to enter the scene in full force.
This prospect of a new influx of institutional money does not just herald the potential for greater liquidity and price appreciation. It also signifies a major step toward the maturation and mainstream acceptance of the crypto sector.
The implications are profound: We are on the brink of witnessing a new chapter in the evolution of financial markets, as traditional and digital assets increasingly converge.
As we stand on the cusp of this transformative shift, the anticipation is palpable. Hold on tight; the crypto space's next growth phase could be a wild and exhilarating ride.
Best,
Alex
