3 Takeaways From The Current Bitcoin Rally

Bitcoin has been soaring non-stop since February, but investors need to know why it's happening and whether it can continue.

If there’s one chart that sums up the markets over the past month or two, it’s probably this one.

To be clear, I’m not a crypto bull or bear. I do own some bitcoin via ETFs in my own portfolio (GBTC and BITO, for the record), but I approach the price action in the crypto market strictly as an observer. If you’re expecting me to say either that bitcoin is going to the moon or bitcoin is going to be worthless, you won’t find that here today. There are plenty of other places to find maximalist opinions.

Instead, I want to view the recent bitcoin rally through the lens what we know has happened, what we think will happen soon and how that will impact bitcoin investments into the future. The one thing I will say right off the bat is that if bitcoin were viewed as a purely speculative investment traded only be people looking for moonshots, it clearly no longer can be. I don’t think I’m sounding like a crazy person when I say that this is a legitimate, burgeoning asset class that must, at a minimum, be considered by investors and financial advisors.

Because bitcoin ETFs have been all the rage this year, let’s take a quick look at where the market stands right now.

GBTC is technically still the largest bitcoin ETF, but that’s because it converted with nearly $30 billion already in tow. The iShares Bitcoin ETF (IBIT) has been the biggest winner and is already on the verge of becoming one of the 100 largest ETFs in just its first two months. In reality, every issuer has been a winner. Even the WisdomTree Bitcoin ETF (BTCW) with just over $70 million has likely become profitable and will continue growing over time.

The flows story highlights the Grayscale problem with this narrative.

With an expense ratio of 1.5%, GBTC is easily the most costly fund of the bunch and was always going to experience an exodus of shareholders once a cheaper alternative was available (Grayscale has already filed for a cheaper Bitcoin Mini Trust, which should help stop the bleeding somewhat).

But some investors were looking at the offsetting flows from GBTC vs. the other bitcoin ETFs as a sign that the bitcoin ETF launches weren’t successful. When you look at trading volume, there was clear retail interest in these products and it was just a matter of time before the flows caught and started telling the real story. What started as a slower build has continued to pick up momentum. Flows over the past 1-week and 1-month periods show money still flowing in steadily and it could be just a matter of months before some of these ETFs double in size again.

How has this rally happened? More importantly, can it and will it continue? Here are my three key takeaways from the current bitcoin rally.

Bitcoin ETFs Helped, But They Weren’t The Only Catalyst

The launch of spot bitcoin ETFs have opened up the crypto market to a huge universe of investors who didn’t have access to it before (at least the ones who didn’t want to go through the trouble of opening their own crypto wallet). Adding that many new potential investors and that much demand to an asset class that only has a limited supply available was very likely to create a boom period for bitcoin.

Looking at the chart, it was definitely a “buy the rumor, sell the news” event. Traders wanted to scoop up bitcoin in whatever form they could in anticipation of the official ETF approvals from the SEC. Once it happened, a lot of investors locked in gains and reset.

But that doesn’t answer the question of what has happened from February to now.

I don’t think it’s due to tech stocks or the magnificent 7 or, really, any kind of risk-on sentiment at all! I think it’s because of what’s going on with gold.

Over the past few weeks, what is the one asset class that’s been rising as decisively as bitcoin? It’s gold. In fact, look at the correlation of bitcoin and gold over the past month.

In the past 20 trading days, the correlation between bitcoin and gold has been 0.94! That means they’ve moved in virtual lockstep with each other. Gold tends to rally during periods of market unrest. I think investors might actually be viewing bitcoin as a hard asset as opposed to just a speculative one. I think they may actually be viewing it as a safe haven alternative to stocks and bonds.

I know that sounds far-fetched given how volatile bitcoin is, but the correlation is undeniable. I really think, to some degree, that the rally in gold has helped lift bitcoin along with it. That and investors just being wildly bullish on crypto in general.

The Flow of Retail Investors Into Bitcoin Is Only Beginning

Spot bitcoin ETFs now account for $58 billion of investor money. Add in leveraged, inverse and futures-based ETFs and that number climbs to $63 billion. There’s a huge amount of money invested in these things already and it’s likely to get exponentially larger.

But think about what isn’t there right now. Namely, participation from the big money managers.

Big names, including BlackRock and Fidelity, have only begun recommending and/or allocating bitcoin into their model and client portfolios. In Canada, Fidelity’s All-In-One Conservative ETF just allocated 1% of the portfolio to bitcoin. And that’s in a CONSERVATIVE fund!

BlackRock announced that they’re opening up several of their mutual funds and ETFs to add IBIT to their portfolios.

It’s just starting, but imagine what happens when these mega-issuers start allocating to crypto in a more widespread fashion. What happens if Vanguard decides to change its mind on allowing crypto investments into its customers’ accounts? What’s in bitcoin ETFs already may just be the tip of the iceberg. I get the sense that retail involvement in the entire cryptosphere is still minor. If the floodgates keep opening up to retail and they keep buying, it could extend this rally quite a bit further.

The Potential For Bitcoin Via Financial Advisors Is Huge!

This is a similar idea to the big money managers allocating to crypto. Financial advisors will likely need to do the same and soon!

Advisors have for the most part been able to avoid the bitcoin conversation up until this point. It was still considered a “fringe” asset class by some. There was no clean, easy and cheap way to own it unless you wanted to go through one of the crypto exchanges and those had a reputation as being rife with fraud. It was easy for advisors to justify punting on allocating clients into bitcoin.

Today, there’s no more excuses. If you’re not at least having the bitcoin discussion with clients and/or educating yourself on the technology itself, you’re at high risk of being left behind. Once spot bitcoin ETFs were created by several major money managers and some of those managers began allocating bitcoin to mutual funds, ETFs, client portfolios and model portfolios, the implication was clear. Crypto is now a legitimate asset class if it wasn’t already.

There are probably a handful of advisors out there who have already put clients into bitcoin, but that number is likely to rise exponentially. With ETFs available at expense ratios of less than 0.20% in some cases, there are no more roadblocks for further retail access. The current path of net inflows for bitcoin ETFs demonstrate clearly that the demand is there. Once advisors get on board en masse, billions and billions of dollars will keep flowing in.

Conclusion

Again, I’m not a huge crypto bull, but I do think the investment case right now is compelling, even with bitcoin trading north of $70,000.

The retail arrival into bitcoin is in the very early innings and I expect the pace of inflows into bitcoin ETFs will remain vigorous throughout 2024 and beyond.