Shattered. Brutal. Collapse. These are just a few of the terms used to describe cryptocurrency in 2022. Between the spectacular implosion of the FTX crypto exchange, and the tumbling failure of hedge funds and cryptocurrencies, this was a sector that lost $2tn in just a few months.
As the jewel in crypto’s hollow crown, meanwhile, Bitcoin price wasn’t immune to the chaos. The numbers are stark. In June 2022, the cryptocurrency was worth less than $25,000, down from a record high of $69,000 just seven months earlier. By December 2022, it had lost some 63% of its value compared to the start of the year. The ECB condemned it as being “on the road to irrelevance”.
How quickly the direction of travel can change. Buoyed by fiery investor confidence, and by regulatory tweaks that make it easier to invest, the king of crypto is back and apparently stronger than ever. This week, the price hit $73,000, a new peak, with rival cryptos such as Ethereum and Solana also experience a surge in value. A growing number of analysts are forecasting the price to hit $100,000 this year.
For many, Bitcoin’s revival speaks to a more essential shift, one that prods it towards becoming a respectable member of the financial family. Not everyone is convinced. For while it’s doubtless more straightforward to get involved, critics worry that little has changed since the 2022 fiasco – and that another crash is inevitable somewhere down the line.
The impact of ETFs
The main driver of Bitcoin’s latest renaissance can be summarised in three letters: ETF. Exchange-traded funds, are investment vehicles allow individuals or institutions to trade in a product, without needing to purchase the underlying asset.
In January, the US Securities and Exchange Commission (SEC) finally approved ETFs for the general (or ‘spot’) Bitcoin market – and it’s already obvious that the consequences are vast.
“The SEC’s decision simplifies the process, and makes it a more familiar one for someone happy to buy an ETF, rather than making a direct investment,” says Lindsay James, an investment strategist at Quilter, a wealth management firm. Just as importantly, James stresses that ETFs overcome the limitations of traditional investment techniques, typified by dubious crypto exchanges and cumbersome digital wallets – and which long unnerved potential investors.
This excitement is strikingly reflected in practice. Quite apart from the barnstorming price, major institutional investors are rushing to board the Bitcoin bandwagon. Based in Maryland, for instance, Patient Capital recently requested SEC approval to sink up to 15% of its $1.8bn in assets into Bitcoin ETFs. BlackRock, for its part, raced to establish one of 11 new Bitcoin ETFs. It’s already worth over $10bn.
Impact on the wider cryptocurrency market
At the same time, there’s evidence that the Bitcoin bull market is helping other cryptocurrencies. Describing Bitcoin as a “comet” with a long tail, Professor Bina Ramamurthy, a crypto expert at the University of Buffalo, notes that several other coins are enjoying a boost too.
Laith Khalaf makes a similar argument. As the head of investment analysis at the AJ Bell investment platform says, enthusiasm for assets like Ethereum (up 134% in a year) and Dogecoin (up 125%) speaks to the power of sentiment across crypto. “There does seem to be quite a lot of commonality in terms of when they rise and fall,” Khalaf says. “That makes sense to a certain extent – because if you have these sentiment-driven frenzies, people start looking for where they think they can make quick money.”
That last point is undeniable: time your flutter right and Bitcoin can make you rich. But beyond simplifying the process, do ETFs change the fundamentals of Bitcoin? Ramamurthy is optimistic. With regulators and serious hedge funds weighing in, she expects “systematic” oversight to become more common, while the arrival of giants like BlackRock lend the sector legitimacy.
Does this mark an end to volatility?
To a degree, Khalaf agrees, explaining that the ETF products offered to investors, and the disclosures made to them, are already tightly controlled. Beyond that, though, the analyst remains sceptical. “Even if the central banks, or indeed regulators more broadly, were willing to step in to prevent any kind of volatility…it’s not really something that’s within their gift.”
This powerlessness can be understood by how cryptocurrencies work. By their nature decentralised – mined independently, they can be traded without interference from banks – Bitcoin and its cousins can’t be tamed by officials.
But if that makes Bitcoin popular among libertarians, and indeed criminals wishing to shift funds illicitly, Khalaf fears there’s little preventing future slumps when confidence finally evaporates.
Once you factor in its lack of inherent worth – scarcity aside, Bitcoin doesn’t have the value of physical assets like gold – it’s unsurprising that Lindsay James sees limited corporate appetite for Bitcoin investment over the longer term. And though she stresses that some wealthy clients may pressure their financial advisors to give it a try, James adds that “highly volatile instruments” like cryptocurrency are unlikely to go mainstream.
What happens next to Bitcoin?
Whatever Bitcoin’s eventual fate, the cryptocurrency’s immediate contours are clearer. Likely happening in April, a long-awaited ‘halving’ event will cut the rewards of mining Bitcoin in two. Designed to curb inflation, investors are already assuming halving will bolster prices yet further: with less incentive to mine, the laws of economics dictate that supply will tighten.
That’s doubly true, Ramamurthy says, given some smaller Bitcoin miners may abandon the market altogether – especially when the price of GPUs, vital for many such operations, is itself high.
All the same, the potential for another crash looms. One catalyst could be investors cashing in on their profits, without new buyers stepping in to replace them. Listen to Khalaf and a broader risk involves the very thing that sparked the boom to begin with: confidence. “I think a lot of Bitcoin’s price is driven by sentiment,” he says, “because there aren’t really any fundamentals to get your head around.”
That isn’t to suggest that the current Bitcoin craze is mere froth. As prices continue to surge, consumer interest is likely to increase too. And though the current crypto market is too small to do lasting damage to the broader financial system, regulatory moves could change that. Beyond the SEC, that’s clear on the far side of the Atlantic, with the UK’s Financial Conduct Authority lately announcing it wouldn’t object to Bitcoin exchange-traded notes, which like ETFs make institutional investing easier.
Even if James is right, moreover, and institutional investors finally prove too conservative for Bitcoin, private punters are a different story. Worryingly, Khalaf says that some people are borrowing money to invest in crypto, a situation he characterises as “turbocharging” risk in an already risky business.
Nor is the AJ Bell expert alone here. As a seven-year study by the Bank for International Settlements recently found, a full three-quarters of retail investors lost money on Bitcoin. With odds like that, don’t be surprised if the grim vocabulary wheeled out in 2022 eventually enjoys another outing.
