Bitcoin has been going through a difficult time over the past couple of years, but it seems that it is now finally set for recovery. Investors have been eagerly anticipating this moment for several months, as 2023 brought growth, but then the prices recorded losses towards the last days of summer. Since then, BTC has aimed for continuous recovery, and on January 10th, better consolidation occurred as a result of the approval of the exchange-traded funds. Investors started looking for where to buy Bitcoin again, leading to higher engagement rates in the trading environment.
However, with the next halving event still a few months away, investors are prepared for further growth. And while predictions are never set in stone in the crypto environment, most indicators show that Bitcoin is set for growth unlike anything it has seen before.
Record inflows
Record inflows were recorded in the Bitcoin space, with $2.45 billion in digital asset products by the end of February 17th. The Bitcoin price appreciation that followed, getting the prices above the $50K range, caused the holdings under management to return to their December 2021 levels, which are a little over $67 billion. Investors were expecting far more significant gains following the ETF approval, and while the increase was not as astronomical as they were predicting, there was still a climb of roughly 22%.
However, the Bitcoin price remains almost 30% below its 2021 all-time high levels. Back then, BTC was steadily approaching the $70,000 threshold, but it never actually surpassed it due to the 2022 crash. The overall net inflow of ETFs since their launch in January is almost $5 billion as of February 20th, and analysts were naturally expecting a much stronger reaction in the Bitcoin environment. However, despite the solid figures, it appears that the stronger price reaction still comes from the billion-dollar acquisition announced by some entities.
Retail investors
The main reason behind the hype for ETFs was that it was expected to foster growth and bring a lot of capital to the Bitcoin market. Many predicted that this is the final push needed to bring cryptocurrencies into the mainstream, as investors believe the ecosystem is mature enough for this next step in its development. Since many retail investors showed that they were willing to work with cryptocurrencies but were nonetheless reluctant to do so due to the currency’s volatility, the ETFs would act as a bridge between these two worlds.
It is impossible to determine precisely why the predictions of most investors didn’t come to fruition. But logic dictated that $5 billion inflows into ETFs must mean that the holders sold the same amount. It’s also important to remember that the available supply is not always aligned with the daily issuance and that the two could have different levels. At the moment, miners receive 900 coins per day, the rough equivalent of $330 million every week.
The adjusted daily volume for Bitcoin is somewhere over $10 billion, so the subsidies are not really representative of the pricing. That means that the miner flow is unlikely to be responsible for the prices that resulted in the aftermath of the exchange-traded fund launch. At the beginning of February, Tesla announced that it would allocate 7.7% of gross cash to Bitcoin, or $1.5 billion. Over the next fourteen days, there was a 48% rally as a result. This is another instance of an event that turned out to be far more impactful than the spot ETFs were.
Exchange trust
Over the past few years, the trust level investors have in exchanges has dimmed. Many of them crashed and burned in high-profile cases that made the news and sent ripples through the community. Many people lost tremendous amounts of capital due to the exchange failures, as funds simply melted away. The most noteworthy incident was that of FTX, which declared bankruptcy in November 2022. Since then, the legal cases are ongoing.
But it seems now that exchanges can finally see the light at the end of the tunnel and that they’re finally ready to shake off FTX’s long shadow. The exchange tokens have eventually managed to shrug off the lows brought by this event and are entering the next bull market with renewed energy. The Binance native token is trading at $352, an over 30% increase compared to November 2022. THE OKX exchange has seen a gain of roughly 132% increase and gains of 3,227% since its launch in May 2019.
Migration
Many long-term holders are looking to migrate their positions to spot exchange-traded funds now. There are several advantages that come with this movement, and it’s possible that some of the inflows were offset by the investors who sold equivalent positions. The primary reason why investors would like to make the switch is better and improved tax efficiency. The ETFs enjoy special tax treatment and have favorable rules that prevent the development of capital gains until the selling of the investment.
The custody risks are significantly reduced as well, while fiscal reporting is boosted. While many investors value the ability to trade directly and use their own wallets, many don’t favor that position. This is particularly the case for retail or institutional investors, who also tend to be whales. Since there’s a lot of capital that goes into a single transaction they perform, they want to enjoy the comfort of knowing their money is safe.
Further advantages
Another advantage of dealing with ETFs instead of the coins themselves is higher diversification. It’s always better to have a diversified portfolio that includes a wide array of asset classes instead of just focusing on one or two. This way, you know that your money won’t vanish into thin air if one of the markets is going through a rough period. ETFs contribute to risk distribution. This is especially important because crypto assets traditionally don’t work well with traditional asset classes like stocks or real estate.
When macroeconomics is doing poorly, Bitcoin can be affected as well, but the ETFs can provide a hedge against these situations. Liquidity is also better as well, since exchange-traded funds provide it in higher quantities compared to direct investments. During market hours, investors should be able to sell and buy at standard market rates. Volatile marketplaces need liquidity since they can react to fluctuations much more efficiently that way.
Although a new asset class has appeared in the Bitcoin environment, there are still issues ahead. Cryptocurrency investors must remain mindful of these challenges, and prepared to deal with the unexpected situations that can appear in the environment.
