Bitcoin’s October rally appears to have put the cryptocurrency on a firm footing ahead of central bank meetings in the U.S., U.K., and Australia to assess the stickiness of inflation and determine policy response. The top cryptocurrency rallied nearly 40% in October, hitting a fresh record high of $66,975 as investors cheered positive seasonality and the launch of futures-based bitcoin exchange-traded funds (ETFs) in the U.S. That was the biggest single-month percentage rally since December 2020. While key indicators favor a positive follow-through in the coming months, it may not be a smooth ride if the impending scaling back of stimulus, also known as the taper, by the U.S. Federal Reserve (Fed) and other major central banks rocks equity markets.
Wednesday’s Fed meeting is widely expected to conclude with policymakers announcing plans to begin tapering the monthly $120 billion in asset purchases that have triggered unprecedented risk-taking across all corners of financial markets over the past 18 months. Several policymakers have recently said that inflation is proving to be more sticky than previously expected. Meanwhile, bond traders and interest rates futures have ramped up bets on early rate hikes. On Friday, analysts at Goldman Sachs brought forward their forecast for the first rate hike to July from Q3 2023, according to Bloomberg. The investment banking giant expects the second rate hike in November 2022, followed by two hikes in 2023 and 2024.
All of this is why crypto prices have been fluctuating recently. However, the fluctuations have all been in an upwards direction. Bitcoin went up the most but Ethereum is right there as well. In this article, we will explain exactly what’s going on and why the prices are growing. For more information, make sure you check the Coinbet24 blog. Our blog is listed among the best cryptocurrency based blogs at Top 20 Bitcoin Gambling & Betting Blogs.
Bitcoin Fed Meeting
Fed funds futures are now pricing hikes beginning early in the second half of 2022. The U.S. two-year Treasury yield, which is more sensitive to short-term interest rate/inflation expectations than the 10-year yield, nearly doubled to 50 basis points in October. While equities and bitcoin have remained resilient, things may change if the Fed statement carries fewer references to inflation being “transitory”. That would perhaps imply policymakers’ growing discomfort with high inflation and validate fears of faster rate hikes, in turn, bringing selling pressure to equities and bitcoin.
ByteTree Asset Management’s Charlie Morris told Bloomberg that bitcoin is a “risk-on inflation hedge”. The cryptocurrency’s gold-like store of value appeal mainly attracts buyers when global financial markets see strong demand for growth-sensitive assets. However, bitcoin mostly takes a beating when global markets wilt. Aside from the Fed meeting, investors will keep an eye on Tuesday’s Reserve Bank of Australia’s (RBA) meeting and Thursday’s Bank of England’s rate decision and Friday’s U.S. nonfarm payrolls report. Money markets expect the BOE to hike interest rates this week.
Volt Crypto ETF
It will soon be possible to invest in Bitcoin (BTCUSD) through a U.S.-listed exchange traded fund (ETF)—well, in a roundabout way—after Wall Street’s watchdog gave the green light to a fund that provides investors access to companies that have significant exposure to the world’s leading cryptocurrency. On Oct. 5, the Securities and Exchange Commission (SEC) approved the Volt Crypto Industry Revolution and Tech ETF, which will track the performance of “Bitcoin industry revolution companies,” in other words, companies that hold most of their assets or investments in Bitcoin or that generate the lion’s share of their profit through mining activities.
Although it may not be the ETF that directly holds Bitcoin many crypto purists had hoped for, the SEC’s approval of the Volt Equity fund indicates that the agency is open to signing off on such an ETF if issuers can satisfy its investor protection concerns.
What’s next for ETF?
Although the SEC recently delayed the deadline for four Bitcoin ETFs waiting approval, Gensler has expressed interest in reviewing applications for Bitcoin funds tied to futures contracts rather than the underlying asset since they don’t seek direct exposure to the cryptocurrency. Currently, over a dozen Bitcoin ETFs are awaiting approval, with the latest being Bitwise’s Bitcoin ETF that uses NYSE Arca. The SEC rejected the fund’s previous application in 2019 due to market manipulation and surveillance concerns.
Volt’s hard-fought SEC Bitcoin equity fund approval gives digital asset investors hope that the regulator is warming to cryptocurrency ETFs. Albeit on its own terms, paving the way for imminent approvals later this year and into 2022.
Bitcoin ETF in Action
Eight years after the first application for a Bitcoin exchange-traded fund (ETF) was filed by the Winklevoss brothers, the first Bitcoin ETF in the United States will begin trading at the New York Stock Exchange (NYSE). ProShares—a provider of specialized exchange-traded products based in Bethesda, Maryland—filed an application Friday to begin trading of the Bitcoin Strategy Fund Oct. 19, 2021. The fund, which will trade under the ticker BITO, will track Bitcoin (BTCUSD) prices through futures contracts traded at the Chicago Mercantile Exchange (CME).
Michael Sapir, CEO of ProShares, emphasized that the launch of the ETF constitutes a milestone. “1993 is remembered for the first equity ETF. In 2002 the first bond ETF, and 2004 for the first gold ETF. 2021 will be remembered for the first cryptocurrency-linked ETF.
How did we get here?
The path to approval for Bitcoin ETFs has been a rocky one. Some people consider the Bitcoin ETF a holy grail. It could open the floodgates to the injection of massive investment in the asset class by institutional investors. However, the SEC has been spoiling this dream. They have been rejecting numerous applications for funds that track the spot prices of bitcoin. The agency outlined its concerns with the Bitcoin ecosystem in a January 2018 letter. The letter came to live after the 2017 run-up in bitcoin prices.
In the main, it is concerned with volatility of cryptocurrency prices. Additionally, the potential for price manipulation in Bitcoin’s largely unregulated ecosystem. Major cryptocurrency exchanges, which are used to set spot prices for bitcoin exchange-traded products, are not registered with the SEC. That’s making it difficult for the agency to verify their trade flow.
The Limitations of ETF
While they provide exposure to a rapidly growing asset class, ETFs based on bitcoin futures prices come with several caveats. For one, they may trade at a significant premium or discount to bitcoin’s spot price. For example, the annualized premium for CME bitcoin futures increased by 15% as compared to bitcoin’s spot price in recent days due to investor expectations for the approval of a Bitcoin ETF.5
A situation in which longer-dated futures contracts have higher prices as compared to short-term contracts is known as contango. It could lead to losses for funds that track the prices of volatile assets like bitcoin. Bitcoin ETFs based on CME futures contracts could also be more expensive than other, similar products. Bloomberg Intelligence estimates that fees for a Bitcoin ETF will be 1% for every investment of $1,000. According to the firm, the average active equity ETF charges 0.71% in fees.
Still, the debut of a futures-based Bitcoin ETF is cause for celebration. It represents a significant evolution in the advance toward a fund based on bitcoin spot prices. Bitcoin price set a new record on Sunday, Oct. 17, charging beyond $63,000, after news broke about the imminent listing of the first Bitcoin ETF in U.S. markets.