9 min readAfter the pain of the prolonged crypto winter comes the joy of the latest rally. Market fluctuations have tested the nerves of even the hardiest investor over the last few years as bitcoin fell from its peak of $61,000 in November 2021 to less than $17,000 in the space of a year before recovering to $42,000 in 2023. This article explores some of the catalysts behind the recent surge and then previews what 2024 might hold in store. It also explains how exchange-traded products (ETPs) provide an efficient and regulated way to gain exposure to bitcoin.
Analysing the Latest High
The key market forces that helped drive bitcoin to its current high emerged in 2023.
First and foremost, 13 issuers applied to launch a spot bitcoin exchange-traded fund (ETF) in the US with the Securities and Exchange Commission (SEC). The fact that some of the world’s biggest financial institutions, including BlackRock, Fidelity and Invesco, considered the timing right to submit these applications cemented bitcoin’s status as an asset class. After consolidating since the latest bear market ended in mid-2022, the price rose steadily towards the end of 2023 in anticipation of the SEC’s decision (which eventually came in January 2024) and the subsequent inflows into these products.
A further catalyst, in this case macroeconomic, was inflation. A combination of factors, including pandemic stimulus measures and disruption to supply chains caused by Russia’s invasion of Ukraine, pushed up prices in many western economies to the highest levels in decades. Central banks responded by hiking interest rates to tame inflation, which started taking effect in the summer of 2023. At this point, the markets expected the hikes had peaked and rates would start falling, so capital shifted back into riskier assets, like the stock market and bitcoin.
Incidentally, gold, another rate-sensitive asset class, rose at the same time. But other forces were at play too. Conflicts in Eastern Europe and the Middle East have increased geopolitical uncertainty, and investors tend to allocate some of their funds to safe havens such as gold under these circumstances. Given bitcoin shares many of the characteristics as a store of value - scarcity, divisibility and durability - it benefited from this market trend.
What to Monitor Moving Forward
Projections for bitcoin’s price in 2024 vary, but most are positive. Multinational bank Standard Chartered believes it will hit six figures, and Antoni Trenchev, cofounder of crypto exchange Nexo, agrees:
“My expectation for 2024 is that the twin-turbo boost from the Bitcoin halving & spot ETF approval should propel Bitcoin to $100,000, with the prospect of further highs in 2025.”
To preserve bitcoin’s scarcity, Satoshi Nakamoto, the pseudonymous founder, built a mechanism known as 'halving' into the protocol, which cuts block rewards (earned by miners for validating transactions) in half roughly every four years. The next one takes place in May of this year when the reward falls from 6.25 coins to 3.125. Investors closely monitor halvings because the price has traditionally surged following previous events- by nearly 700% in the 18 months after the latest halving in May 2020- so this effect is worth monitoring in 2024.
But Tranchev also astutely warned that markets rarely move in an upward trajectory uninterrupted:
‘The road to $100,000 will be lined with unexpected potholes and double-digit declines.’
One of those declines occurred in early 2024 when bitcoin fell by more than 16% over 10 days. While there didn’t seem to be a concrete reason for this sell-off, crypto investors have a track record of ‘buying the rumour and selling the news’. In this case, they may have bought bitcoin in anticipation of the SEC’s decision and taken profits once it had been announced.
Looking longer term, traditional valuation models such as discounted cash flow don’t apply to bitcoin due to its unique characteristics, so investors must find other ways to forecast its price. CoinShares favours two approaches:
Total addressable market - Given bitcoin’s original design as a medium of exchange, one way to estimate its potential value is as a percentage of the entire global money supply. Based on this method, if bitcoin captures a 2% market share of fiat money and 20% of gold, it would be worth $260,000.
Market Value to Realised Value (MVRV) - MVRV is a ratio measuring the current value of an asset (its market value) against its realised value, the volume-weighted sum of all the prices it has traded at. A score below one suggests the market is effectively at a loss and presents a buying opportunity and vice versa. MVRV has served as an effective leading indicator on several occasions, most recently in spring 2023 when bitcoin rose from $20,000 to $30,000.
Navigating the Cryptocurrency Landscape with ETPs
While spot ETFs only recently became available, investors have been gaining exposure to crypto since 2015 using ETPs. To avoid confusion, ETP is an umbrella term encompassing a range of products tracking an underlying asset or index, including ETFs, exchange-traded commodities and exchange traded notes.
A major benefit of crypto ETPs is they trade on mainstream exchanges like traditional asset classes, so investors don’t have to buy and sell bitcoin on unregulated or underregulated platforms. This means ETPs can be held in a portfolio alongside shares and bonds and can be incorporated into overall returns.
Crypto ETPs also offer peace of mind, as regulators treat them like other products. Issuers must follow the same accounting procedures and provide full transparency into their holdings.
For investors seeking to add bitcoin to their portfolio, CoinShares offers two options. In Europe, the CoinShares Physical Bitcoin ETP charges one of the lowest fees on the market, and it ringfences the underlying assets to protect holders in the unlikely case of bankruptcy. For Nordic investors, XBT Provider Bitcoin Tracker One trades on the Nasdaq Stockholm and can be held in an ISK account.
Learn more about investing in crypto ETPS.
Key considerations & risks
As with any investment, it is important to be aware of the risks involved in trading crypto ETPs.
Despite being physically-backed by ether, investors’ capital is at risk and investors may lose part or all of their investment, as investors are fully exposed to the price of Ethereum which has been known to experience large gains and losses in its relatively short history.
Crypto ETPs are generally structured as debt securities, and not as equities.
The bid/offer prices of the ETP on an exchange will likely differ from the trading price of the ether
Past performance is not an indicator of future performance and investors should always seek professional advice to ensure an allocation to crypto fits with their overall goals and objectives.
Conclusion
The main catalysts driving bitcoin’s latest surge- applications to launch spot ETFs, falling inflation and its status as digital gold- emerged in 2023. Looking ahead, if the next halving follows previous patterns, it could propel the price even higher. But a correction is always a possibility, as demonstrated by investors apparently ‘buying the rumour and selling the news’ when the SEC announced its decision.
Traditional valuation methods don’t apply to bitcoin, so investors must adopt new approaches to forecasting its price. CoinShares advocates for the Total Addressable Market and MVRV models.
ETPs offer investors a convenient way to gain exposure to bitcoin because they trade on mainstream exchanges and can be held in a portfolio alongside traditional asset classes. They’re also subject to the same regulations as other products.
Learn more about CoinShares Physical Bitcoin ETP and XBT Provider Bitcoin Tracker One.
