The portfolios achieved a positive return of between +13% and +16% in May.
Last month’s increase was largely driven by Ethereum’s good return in April (+23%). The price increase of Ethereum is mostly because the US regulator SEC has approved a number of Ethereum ETF applications. Another approval is required before the ETFs can start trading. This approval is expected to take several days to about 3 months before this final approval is given. Looking at price, a similar scenario to the launch of the Bitcoin ETF is expected for the launch of the Ethereum ETFs. This similar scenario consists of the situation where there will be alternating large inflows and outflows into the Ethereum ETFs, leading to volatility. The outflow will again be caused by Grayscale. After all, Grayscale’s Ethereum fund has approximately $11 billion under management, and for years this fund traded at a discount compared to the underlying value. As comparison, the Grayscale Bitcoin fund had approximately $26 billion under management, with approximately $18 billion sold in recent months.
In the past year, three opportunites were defined that could contribute positively to the further growth of Bitcoin and cryptocurrencies. These were the following:
- Bitcoin ETF
- Bitcoin halving
- Macroeconomic developments
It seemed that these were one-off events, in retrospect we can cautiously begin to conclude that these events have a structural impact on the market, which makes it interesting to zoom in on this.
Bitcoin ETF
The ETF has allowed for fresh capital to flow into Bitcoin. After a good start for the ETFs in February and March, April was the first month in which no fresh capital was invested in the Bitcoin ETFs. April was also the first month since the launch of the Bitcoin ETFs were the return was negative. May was positive again with approximately $2 billion invested capital. What is striking is that the returns on Bitcoin were negative in the month in which there was no inflow, while in the other months the returns were positive. This confirms the idea that the price responds to supply and demand.
In terms of size, the ETFs are also becoming a factor to take into account. Global Bitcoin ETFs broke the 1 million Bitcoin holding barrier for the first time last month. Since the launch of the American Bitcoin ETFs about 4 months ago, approximately 280,000 Bitcoin have been added by these funds. On the other hand, the analysis of the Bitcoin blockchain shows that contrarian long-term Bitcoin investors in recent months approximately have sold 630,000 Bitcoin. Previous cycles show that when prices rise, there is a percentage of investors who sell, dampening the price rise. Looking ahead, the expectation is that demand for Bitcoin ETFs will further increase as a result of the successful launch. The ETF has been relatively popular among hedge funds since its inception. It is now known that the ETF providers are also in discussions with pension funds, endowments and sovereign wealth funds, with the potential for tens of billions in new inflows.
Bitcoin halving
The halving itself was a non-event. In the coming months/years, the new supply of Bitcoin (from 900 Bitcoin per day to 450) will slowly dry up due to the halving. To illustrate, in the next 12 month period, 164,250 Bitcoin will be mined. If the ETFs continue to purchase at the pace of recent months, they will add 750,000 Bitcoin in twelve months. This difference in supply and demand will lead to price developments.
Macroeconomic developments
Interest rates and inflation have been discussed extensively recently. What has received less attention is global liquidity. Bitcoin’s all-time high in March corresponded with a surge in US liquidity. Liquidity is currently not increasing, an increase in this liquidity will be positive for risky investments (such as Bitcoin and crypto). During the corona period we saw a huge increase in liquidity, which was ultimately positive for cryptocurrencies. The European Central Bank (ECB) has now started cutting interest rates, the US FED will follow at a later date. Lower interest rates are also generally positive for riskier investments. Globally lower economic growth means that government debts relative to GDP are rising, in combination with higher interest rates this also results in high annual interest payments. In the United States, these annual interest payments amounted to approximately $300 billion in 2021, but these payments have now tripled to $900 billion. These annual costs are expected to double in the next 10 years. This puts enormous pressure on the US government budget, which amounts to approximately $6,500 billion annually. Increasing debts and deficits will again lead to an increase in the number of dollars in circulation, and scarce assets are expected to benefit from this.
Despite record inflows into Bitcoin ETFs, Bitcoin’s all-time high has not yet been broken. This shows that in addition to the ETFs, there are several markets on which Bitcoin is traded. The futures market remains a market that influences the price. Hedge funds are now about $6 billion short on the futures markets, as long as these positions remain or grow the price will be slowed down to some extent. In addition to these short positions on futures, they have also purchased the Bitcoin spot ETF, with which hedge funds generate a risk-free basic return. The unwinding of these positions will cause volatility. In addition to the general risks that apply to riskier investments, this is something to keep an eye on in the short term.