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Volatility is back for Bitcoin and the entire cryptocurrency market. The Iranian offensive against Israel led to a sudden drop in prices over the weekend. The strength of the US dollar, the weakness of the stock market, pre-halving forecasts, still strong outflows from Grayscale’s ETF, and the acceptance of a BTC and ETH ETF in Hong Kong have all influenced market action. Let’s delve into this.
This downtrend for the week coincides with a notable strengthening of the US dollar, which is on track to achieve its best performance over five days since February 2023. According to The Kobeissi Letter, this appreciation of the dollar is driven by expectations of interest rates remaining higher for longer than anticipated. Initially, markets expected the Fed to begin cutting rates as early as June, but the consensus has shifted towards prolonged high rates. The value of the dollar, measured by the Bloomberg Dollar Spot Index, which compares the dollar to ten of the world’s major currencies, has increased by about 2% over the last five trading days. This rise reflects an improvement in its position relative to other major currencies such as the euro, the British pound, and the Japanese yen. While the relationship between Bitcoin and the dollar is not systematically correlated, they have historically shown an inverse relationship.
Despite the drop, Bitcoin has recorded a resurgence in its market dominance, reaching 52.86% on Sunday, its highest level since April 2021, marking a significant reversal from its dominance decline observed in February.
It must be said that the BTC network is doing very well. On Wednesday, Bitcoin mining difficulty reached a new all-time high, with an increase of nearly 4% to 86.4 trillions, just before the block reward halving event scheduled for next week. This last adjustment before the halving took place at block 838,656, according to the blockchain explorer Mempool, marking a ramp-up of miners preparing for a decrease in rewards from 6.25 BTC to 3.125 BTC per block. Mining difficulty indicates the level of complexity to generate a new block compared to the easiest possible situation and adjusts every 2016 blocks to maintain the creation of blocks at an average pace of 10 minutes.
The network’s hash rate, which reflects the total computational power dedicated to mining by miners, also reached a peak with a seven-day moving average of 629.75 EH/s, a record according to data from The Block. This increase in difficulty and hash rate since the beginning of the year—20% for difficulty and 24% for hash rate—suggests intense preparation by miners in the face of the imminent reduction in rewards. However, it remains to be seen how this reduction will affect less efficient mining operations and, consequently, the overall network metrics after this subsidy drop.
Bitcoin’s halving is now scheduled for this Friday. The halving of Bitcoin rewards is a significant event that occurs every four years and is essential for the operation of the most important cryptocurrency in the market. This process is embedded in the code of the Bitcoin protocol and consists of halving the rewards granted to miners for each new block created, from 6.25 BTC to 3.125 BTC. This change will occur at block 840,000 and aims to make new coins rarer, which could, historically, increase the price of Bitcoin. In addition to its impact on scarcity, the 2024 halving is drawing attention for other reasons. With the approval of Bitcoin spot-traded funds by the Securities and Exchange Commission, more sophisticated investors are entering the market. This means that even ordinary investors might soon inadvertently hold Bitcoin in their portfolios. Historically, the price of Bitcoin has always increased after a halving, although not immediately. With the increase in capital entering the crypto space and the commitment of major asset managers like BlackRock, the fundamentals are considered solid for a significant new appreciation of Bitcoin following this event. Thus, the Bitcoin halving is a phenomenon that even Bitcoin enthusiasts should follow with interest, as it could significantly influence the value of their investment.
In the face of these changes, miners are forced to optimize their operations and innovate in terms of energy sources and equipment to remain competitive. The less efficient could be forced to shut down, potentially shifting mining activity to regions with lower energy costs, such as Latin America or the Middle East, offering opportunities for new players. This could also influence the centralization of the mining industry, although natural economic forces tend to limit this risk. The halving therefore represents not only a liquidity shock for miners but also a decisive moment that could purge the sector of unprofitable operations, contributing to an improvement in Bitcoin’s mining infrastructure.
According to Bitwise Asset Management, market reactions following previous Bitcoin halvings show an interesting pattern where the long-term impact of these events is often underestimated. Historically, although the price of Bitcoin has shown only slight movements in the month following each halving, the gains observed the following year have been considerably more significant. For example, after the 2012 halving, the price of Bitcoin increased by 9% in the first month, then climbed 8,839% the following year. A similar pattern was observed in 2016 and 2020, with respective increases of 285% and 548% over the year following the halving, despite initial drops. This market cycle is peculiar as this is the first time Bitcoin has reached a historical peak before a halving, with a peak at $73,679 on March 13, before correcting to $61,500. Industry experts, such as the CEO of Marathon, Fred Thiel, and the head of research at 10x Research, Markus Thielen, anticipate short-term bearish pressures, particularly due to potential mass sales by miners after the halving. These observations suggest that, although immediate post-halving corrections are taken into account by the market, the repercussions in the longer term could still pleasantly surprise investors.
Bitcoin spot-traded ETFs in the United States have recorded net outflows for the third consecutive day, with more than $58 million leaving these products yesterday. This activity has reduced the total cumulative net inflows to about $12.43 billion. The Grayscale GBTC fund is largely responsible for these net outflows, having recorded an outflow of nearly $79.4 million, according to data from SoSoValue. The Ark 21Shares Bitcoin ETF also experienced net outflows, with about $12.88 million withdrawn from the fund. Meanwhile, the majority of other Bitcoin spot-traded ETFs saw modest inflows, ranging from $1.37 to $3.56 million, with the exception of the iShares Bitcoin Trust, which led the inflows with $25.78 million attracted. Overall, the volume of Bitcoin spot-traded ETFs stabilized in April after experiencing a steady decline since their early March peak, with cumulative volumes reaching $215 billion on Monday. Additionally, the flows, both inflows and outflows, have contracted and become tighter since March.
Since the launch of Bitcoin spot-traded ETFs in the United States on January 11, the bitcoin holdings of the Grayscale GBTC fund have been halved in about three months. Initially, the Grayscale Bitcoin Trust, which was converted into an ETF, held about 619,220 bitcoins, but this number has dropped by about 50% to 311,621 bitcoins, according to the latest disclosures from the fund. Despite this significant drop in terms of the quantity of bitcoins held, the value of assets under management of GBTC has only decreased by 31%, from $28.7 billion to $19.8 billion, thanks to the increase in the price of bitcoin during this period. The combined assets held by all US Bitcoin spot-traded ETFs now amount to nearly 840,000 BTC, representing more than 4% of the total supply of 21 million bitcoins.
Market regulation in Hong Kong recently approved, under conditions, several applications for Bitcoin and Ethereum traded funds (ETFs). Asset management companies China Asset Management and Harvest Global Investments announced the in-principle approval of their applications by the Hong Kong Securities and Futures Commission (SFC). Concurrently, Hong Kong has taken steps to establish itself as a center for cryptocurrency, including the launch of a licensing regime for Virtual Asset Trading Platforms (VATP) in June 2023, despite the ongoing crackdown on cryptocurrencies on the mainland.
Bitcoin spot-traded ETFs in Hong Kong could be launched by the end of April, according to OSL, the sub-custodian and infrastructure service provider for several fund managers. According to Katie He of ChinaAMC, the demand for these new financial products could be considerable, as professional investors in Hong Kong, who until now had access only to spot-traded ETFs listed in the United States, will now be able to invest locally. Eric Balchunas, senior ETF analyst at Bloomberg, however, threw a bit of cold water on the excitement. “Don’t expect much flow… we think they’ll be lucky to get $500 million,” he wrote on X on Monday, adding that the Hong Kong ETF market is “tiny” and that “the Chinese can’t buy them, at least officially.” These ETFs offer an alternative to licensed cryptocurrency trading platforms or futures-based ETFs, which have high rollover fees. Additionally, the Hong Kong ETFs stand out for their “in-kind” feature, allowing investors to exchange Bitcoin directly for regulated ETF shares, simplifying the investment process while reducing risks such as hacking and fraud. Gary Tiu of OSL underscores the importance of this feature, unique to the retail fund market, offering investors a new way to diversify their investments without leaving their initial BTC position.
According to analysts at JP Morgan, there is a 50% probability that the US SEC will approve or reject the Ethereum spot-traded ETF next month. This estimate comes as the regulatory agency has recently taken actions against entities related to the Ethereum Foundation, reinforcing the increasingly pessimistic market sentiment regarding the approval of this new investment vehicle. The Ethereum Foundation, which supports the Ethereum ecosystem, is under investigation by a state entity, although the SEC has not officially confirmed this information. The JP Morgan report also suggests that if the Ethereum ETF is not approved by next month’s deadline, the applicants might initiate a lawsuit against the SEC, similar to previous legal cases involving Grayscale and Ripple. However, the bank’s analysts are skeptical about the SEC quickly classifying Ethereum as a commodity rather than a security in the coming weeks.
Sam Bankman-Fried, founder of the now-defunct cryptocurrency exchange platform FTX, has appealed his federal conviction and prison sentence, following his recent sentencing to 25 years of imprisonment. The sentence was pronounced by Judge Lewis Kaplan of the Southern District of New York court, who also ordered Bankman-Fried to return $11 billion after the Department of Justice demonstrated that he had embezzled more than $8 billion from FTX to fund venture capital investments, celebrity sponsorships, and his own lifestyle in the Bahamas. The defendant had been found guilty in November of seven charges, including fraud, money laundering, and conspiracy, charges that could have earned him up to 110 years in prison. During the deliberations, Bankman-Fried’s lawyers described the jury’s recommendation of 100 years in prison as “grotesque,” pleading for a sentence of only 6.5 years. However, Judge Kaplan judged that the government’s sentencing request was “much greater than necessary,” recommending that Bankman-Fried serve his sentence in a medium or low security prison, close to San Francisco to facilitate family visits. According to legal experts, it is likely that Bankman-Fried will serve at least 21.25 years in federal detention, considering a 15% automatic sentence reduction. Judge Kaplan highlighted the significant risk that Bankman-Fried could again be in a position to commit reprehensible acts in the future.
The United States Securities and Exchange Commission is preparing to take legal action against Uniswap, one of the largest decentralized exchanges, a predictable move given the agency’s increasing attention on the decentralized finance (DeFi) sector. Uniswap received a Wells notice, which is a formal notice indicating that the SEC is considering bringing charges, which could happen in the coming month. This initiative is part of a broader trend by the SEC to regulate major crypto market players to maximize its impact on the market, according to Jennifer Schulp of the Cato Institute and Teresa Goody Guillén of BakerHostetler. The SEC is also considering a rule proposal that would expand the definition of an exchange to include DeFi exchanges, which would require regular filings with the SEC and impose mandatory disclosures as well as strict limits on their operation. This proposal indicates that the current regulatory landscape does not clearly cover DeFi, a point on which Schulp disagrees. This development comes as the crypto industry criticizes the SEC for its approach of “regulation by enforcement,” arguing that the current rules do not allow for adequate registration.
What to expect next on the markets? According to analysts at Bitfinex, the current behavior of Bitcoin holders reflects that observed in December 2020, just before a significant market growth phase. A marked decrease in the amount of inactive Bitcoin, which has not been moved for more than a year, indicates that long-term holders continue to reduce their presence on exchanges or withdraw their assets from centralized platforms. This trend, coupled with the imminent supply constraint due to the upcoming halving, could lead to future price growth. Bitcoin reserves on exchanges have reached historically low levels, according to data from CryptoQuant, signaling a drop to about 1.94 million Bitcoins against 2.8 million in July 2021. This context sets the stage for the next halving event. The recent arrival of Bitcoin spot-traded ETFs and a strong wave of capital inflows could also influence the impact of this next halving on the market.
The presented information is as of April 17th, 2024, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
