This time last year, Bitcoin was nearly dealt a death blow as the crypto world was left reeling from numerous crises. One pillar fell after another, from the Terra stablecoin collapse to the bankruptcy of lender Celsius and then the demise of the world’s second-largest crypto exchange, FTX.
Following an epic downturn in the crypto world, the price of the leading currency slumped to about $16,000 in early November, where it remained until the end of the year.
Twelve months later, the world’s original cryptocurrency is back on its feet.
Bitcoin has recovered substantially and is up over 100% year-to-date, beating the returns of significant stock benchmarks many times over. It has clawed back all the ground it lost since last year’s crypto collapses began.
Prices have been buoyed by growing anticipation of spot exchange-traded funds (ETFs) for Bitcoin. Regulators in the U.S. are reviewing between eight to 10 applications by asset managers, including BlackRock, Franklin Templeton, and Fidelity, who are each vying to launch their spot in Bitcoin ETF. If the regulators give the green light, it could create a whole new category of funds for investors’ ETF portfolios.
Considering the suitability of these spot ETFs for their portfolio and learning more about the drivers of Bitcoin’s price action may help investors better judge whether to seek exposure to this unique digital asset over the coming years.
The arrival of ETFs for Bitcoin could change the investing landscape as investors seek refuge in the asset class during market and geopolitical turmoil using a hedging strategy similar to investing in gold.
The arrival of ETFs could add the investment-grade legitimacy Bitcoin needs for further institutional adoption.
“We feel extremely confident it [spot Bitcoin ETF approval by the SEC] will come in early 2024,” says Mike Soroudi, CFA and VP at Digital Asset Investment Management. “There could be delays from the SEC, but we don’t see them pushing back approval beyond the end of 2024. The most likely scenario, to us, is that multiple ETFs, if not all eight, gain approval at the same time, preventing any one company from monopolizing the AUM [assets under management] for a spot Bitcoin ETF.”
Alec Tuckman of Wealth Management Partners of Los Angeles recognizes the strong momentum toward a Bitcoin ETF.
“However, just because you can [invest in it] doesn’t mean you should,” he warns. “There should be some kind of strong disclaimer that goes with putting your money into one of the more aggressive assets around.”
Word of Caution
Financial advisors tend to be more cautious about cryptocurrencies than their clients. A joint 2023 survey by Bitwise and VettaFi revealed that only 37% of advisors professed to have personally invested in digital assets. Fifty-nine percent of advisors surveyed reported that “some” or “all” of their clientele were investing in crypto on their own.
In framing the enigma of Bitcoin, Tuckman refers to Warren Buffet, an avowed crypto skeptic, who said the asset will one day either “be worth everything or nothing.”
“You are encouraging people to put their retirement accounts, that is, their life savings, into one of the most volatile instruments around,” Tuckman adds. “The more people buy in, then yes, the value goes up, but with little diversification here, how much sense does it really make when planning for stability in your retirement years?”
Last year, Fidelity Investments, the largest 401(k) plans provider, began offering a Digital Assets Account to clients that can partly allocate savings in Bitcoin.
Not all providers are so gung-ho. In July, Vanguard executives described putting a cryptocurrency fund option into a 401(k) lineup as “very premature.” Individuals must consider carefully whether Bitcoin or similar digital assets have a place in their retirement savings plan.
Back on Track?
Although optimism has returned to crypto markets, last year’s drama still casts a long shadow over the landscape.
Disgraced crypto tycoons are still in the media spotlight. FTX founder Sam Bankman-Fried (SBF), the poster child for the industry’s greed and excess, has been found guilty on all seven counts of fraud this month. The 31-year-old executive could face more than 100 years behind bars for his crimes.
Tuckman says Bitcoin will probably eventually rebound to its all-time highs as people move on from the FTX fear saga. “Bankman-Fried and others of his kind will become a faded memory until we see yet another fraud of his type,” he said.
However, not all advisors see the news cycle as particularly relevant to Bitcoin price fundamentals.
“Crypto is recovering, but it moves in cycles, so it doesn’t necessarily have anything to do with SBF,” says Soroudi. “The price tends to rally and fade around the BTC [Bitcoin] halving which occurs every four years,” he adds.
The Bitcoin halving is a programmed event that cuts the network’s issuance rate (equivalent to an inflation rate) by 50% each time 210,000 blocks have been mined. The next scheduled halving for Bitcoin is set to occur in April 2024.
The last time the digital currency was halved, the price surged over the next several months, and some experts are predicting sky-high future valuations.
Leading Wall Street research firm Bernstein recently forecasted Bitcoin as reaching $150,000 by mid-2025. Cathie Wood, founder of tech-focused asset manager ARK Invest, has even higher expectations. The famed investor predicts Bitcoin to reach nearly $1.5 million by 2030.
“Bitcoin price predictions are fun,” admits Soroudi. “Internally, we have a price target of $130,000 by the end of 2024.”
Wherever Bitcoin’s price heads next, the cryptocurrency continues to attract attention from institutional and retail investors alike. The addition of spot ETFs could prove a game changer for this asset class. Interested investors must consider their risk appetite, time horizon, and understanding of Bitcoin’s value proposition. Financial advisors will want to lay the groundwork to ensure they can best advise clients on how to invest in funds linked to the token securely and warn of the shortcomings of this strategy, too.