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  • Writer's pictureBlockstone Capital

Bitcoin has more than doubled so far this year - the surge is not solely driven by spot Bitcoin ETF

Updated: Oct 27, 2023

Undoubtedly, a portion of the Bitcoin rally can be credited to the heightened anticipation surrounding the Bitcoin spot Exchange Traded Funds (ETFs). Only yesterday, Bitcoin experienced an uptick of over 12% subsequent to the disclosure of the proposed iShares Bitcoin Trust — complete with its ticker — on the Depository Trust and Clearing Corporation's platform.

Upon closely analysing the relationship between Bitcoin and the S&P 500, Bitcoin's performance is clearly detaching from traditional markets. Last week, while the U.S. stock market lost a massive $1 trillion in value, Bitcoin rose by about 9%. Today, Nasdaq100, is down 2.5% while BTC is up 2.7%.

Currently, we can see Bitcoin performing as a 'safe haven' asset. Despite the Federal Reserve's upbeat statements discounting the chance of a recession, the S&P 500 has shed a whopping $3.5 trillion in value. Its high point was in July 2023, and since then, it has fallen by 9%, marking its lowest level since the end of May.

As we approach the earnings season, the market is dangerously close to a correction. The top seven tech giants are notably in a vulnerable spot, seemingly approaching a concerning double-top pattern in technical analysis. Unless we see a significant drop in current interest rates, these tech stock valuations may be headed for a considerable adjustment.

Furthermore, on Tuesday 24 October, a noteworthy observation was the unparalleled volume of Bitcoin CME futures trades, surpassing any other day in 2023. This clearly signifies the re-entry of traditional finance magnates into the Bitcoin trading sphere.

Many investors view Bitcoin as a hedge against macroeconomic uncertainties and geopolitical tensions. Its decentralised nature, finite supply, and global acceptance position it as an alternative to traditional fiat currencies and assets. Especially in times of economic instability or inflation, Bitcoin and other cryptoassets can act as a store of value or a safe haven for capital preservation.

Cryptocurrency isn't just a diversification tool. Smart investors are looking for uncorrelated assets to enhance their classic portfolios, and digital assets provide that diversification. For instance, by allocating just 5% based on our strategy, portfolios could see better returns with less volatility and a lower correlation with other assets. This approach could elevate a typical portfolio. It not only boosts returns and improves the Sharpe ratio over time but also mitigates volatility and major losses, all while adding an uncorrelated asset.

Think of the digital asset market as the commodities market of 20 years ago. Back then, commodities were a fresh way to diversify, thanks to their low correlation, and they benefited from growth in emerging economies.

Now, more investors are recognising that digital assets have what it takes to be classified as a new asset class. Just like the commodities market in its early days, the digital asset market is still young but is growing in accessibility and regulatory support. It offers a new investment opportunity focused on diversification and potential price growth.

At Blockstone Capital, we have started to diversify into digital assets by choosing to invest in hedge funds. This decision showcases our strategy to achieve reduced correlation in portfolios. Investing in a 'fund of hedge funds' is especially appealing, allowing us to tap into this emerging asset class that promises high returns while maintaining lower volatility and mitigating counterparty risks.

So, coming back to Bitcoin spot ETFs approval, Bloomberg analysts suggest a 90% chance of a spot Bitcoin ETF getting approval by January. It seems more a question of 'when' rather than 'if', with the latest example of Grayscale recent success in its legal dispute with the SEC regarding a spot Bitcoin ETF. The SEC's rejection of Grayscale's proposal to convert its $17B trust into a spot ETF has been criticised as "arbitrary and capricious". We have already early estimates from Galaxy that predict Bitcoin ETFs might see inflows around $14.4B.

In conclusion, there are multiple positive indicators on the horizon that could materialise in the upcoming months:

SEC's Consideration of Spot ETFs on Crypto: The potential approval of spot ETFs by the SEC could significantly impact the cryptocurrency sector. Such an endorsement would make it more accessible for institutional investors to enter the crypto space, likely boosting demand and subsequently, prices.

Bitcoin Halving: Slated for April 2024, the next Bitcoin halving will see the reward for mining Bitcoin reduced by half. Historically, this has limited the new supply of Bitcoin entering the market, which can exert upward pressure on prices. It's worth noting that this halving might coincide with the Fed's next phase of monetary easing.

By Carl Szantyr, Managing Partner, Blockstone Capital



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