Bitcoin bulls are back at it, pushing the popular crypto to $70,000. In the ever-evolving finance landscape, few phenomena like Bitcoin have captured retail investors' and institutional giants' imagination and attention. Initially viewed with scepticism, bitcoin has gradually gained acceptance and legitimacy, as is evidenced with Bitcoin ETFs. Despite its growing acceptance, bitcoin continues to grapple with regulatory uncertainty and scrutiny from policymakers worldwide. Adding to the excitement is the hotly anticipated Bitcoin "halving" event. But as the market evolves, will the asset class become more stable? We explore just that in the article below.  

Bitcoin ETFs: Opening Doors to Mainstream Adoption

The 2024 rally has been spurred by the slight hints of mainstream adoption that's become evident. Using peer-to-peer technology to facilitate instant payments, bitcoin surged after US regulators approved spot bitcoin ETFs in January following a decade of rejections. The green light from the US Securities and Exchange Commission (SEC) came on January 11 this year, following months-long talks with top asset managers. A bitcoin exchange-traded fund is a financial product that offers investors a way to dip their toes into the crypto market without actually holding the digital asset itself. With shares of Bitcoin ETFs traded on traditional stock exchanges, the barrier to entry for investors has always been higher.

The milestone decision paved the way for institutional giants like BlackRock, Fidelity, and Invesco to enter the fray. This sparked renewed investor optimism in the crypto market without the risk of holding the digital token directly.

Tracking institutional flows into Bitcoin ETFs

Bitcoin, which hit $73,800 on March 14, sent waves of excitement through the market. But as quickly as it ascended, it plummeted, dropping over 10% to $60,760 in the weeks after. According to an asset management group, CoinShares, the greatest outflow was at Grayscale, the largest bitcoin ETF. Grayscale has had more than $1 bn withdrawn from its fund leading to the fall.

Outflows at Grayscale have tempered money flow into the new ETFs since January. The company has had more than $12 bn withdrawals since the SEC approved it to convert its bitcoin trust into an ETF. This significant outflow raises questions about the shifting dynamics within the crypto space and the impact it may have on market sentiment. Firms like Invesco, Franklin Templeton and Valkyrie had minimal inflows in March.

Industry Leaders' Stance on Bitcoin

"When countries mismanage their economies, savers seek to safeguard their wealth. Historically, it was gold. Now, it's bitcoin, too! While I am not convinced about Bitcoin, would it not be better than the Argentinian peso with 276% inflation?" Uday Kotak, Founder of Kotak Mahindra Bank, remarked amidst Argentina's economic turmoil.

At the Australian Financial Review business summit, Jamie Dimon, CEO of JPMorgan Chase, offered a perspective that resonates with many traditional finance players. "I don't know what Bitcoin itself is for, but I defend your right to smoke a cigarette. I'll defend your right to buy a Bitcoin," he remarked. Despite acknowledging the rights of individuals to invest in Bitcoin, the head of JPMorgan Chase remained sceptical, stating that he would never invest in the digital asset himself.

In Union Budget 2023, Finance Minister Nirmala Sitharaman offered no relief to the crypto industry as the government continued its flat 30% tax on virtual assets. The government had imposed an additional 1% TDS on all crypto transactions in Budget 2022.

The next big event - Halving! 

Adding more excitement to the crypto market is the quadrennial "halving" event. Roughly every 4 years, the total number of bitcoins that miners can potentially win is halved. As per Coindesk, In 2009, the system rewarded successful miners with 50 bitcoins every 10 minutes. Three "halvings" later, 6.25 bitcoins are dispensed every 10 minutes. The last Bitcoin halving occurred on May 11, 2020; the next one will likely happen in April 2024.

The objective behind this activity is to maintain a certain semblance of asset scarcity, which would consequently preserve its value. Ultimately, this process will result in 21 million Bitcoins being mined, with no more Bitcoins generated after the final halving event. 

Around every halving event, there has been a spike in the return generated from the asset. 

The analysis of the returns and their distribution indicates that with every halving, there is a decrease in the return and volatility. This evidence suggests that investors should not expect the kind of wild returns witnessed in 2012 and 2016 to some extent as the market evolves. The one segment of participants that does directly stand to be impacted is the miners, as block rewards are halved.

As we reflect on the twists and turns of Bitcoin's journey, one thing becomes abundantly clear - navigating the crypto landscape requires a keen understanding of market dynamics, regulatory developments, and investor sentiment. While the introduction of Bitcoin ETFs signals a step towards mainstream adoption, challenges and uncertainties remain, as evidenced by the recent fluctuations in the market. As the nature of holders of Bitcoin changes from crypto hobbyists and enthusiasts to formal institutional investors, the asset will have to be viewed from a different lens.

 

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This article has been prepared by Kotak Mahindra Asset Management (Singapore) Pte. Ltd. (“KMAMS”).