With less than six months to go before Bitcoin’s mining rewards are halved again, heralding a fierce wave of currency deflation in the process, expectations for a sharp rise in Bitcoin prices are so strong. If past precedent holds, Bitcoin should now be gearing up for its legendary bull run; hence the excitement surrounding the market for the world’s top cryptocurrency since it hit the psychological $30,000 mark. A number of favorable factors have come together in recent days to create continued bullish momentum surrounding Bitcoin.
On the macroeconomic front, initial jobless claims continued to fall in September, proving the resilience of the labor market, and Fed Chairman Jerome Powell just said he is willing to extend the pause on further interest rate increases as the well-known financial tightening takes effect in the U.S. economy.
Why is Bitcoin interested in the Fed’s interest rate trajectory? As many of our regular readers know, Bitcoin is the world's premier cryptocurrency and it behaves like a growth-focused technology stock, as evidenced by its cyclically high correlation with the Nasdaq. Here's why: Just as the bullish thesis for high-cap stocks hinges on expectations of future profits, Bitcoin's underlying ethos comes from its hard-coded scarcity and expectations of future price increases. Of course, in the financial sector, expectations for future cash flows are not optimistic. Therefore, analysts try to calculate the present value of these cash flows using a discount rate derived from the Federal Reserve's benchmark interest rate. Generally speaking, the higher the discount rate, the lower the present value of future cash flows.
In terms of internal factors, Coinbase recently expressed optimism about the possibility of launching a spot Bitcoin ETF in the United States. A spot Bitcoin ETF would provide investors with great convenience in gaining exposure to Bitcoin without the hidden dangers of futures-based ETFs, where contango-related roll losses reduce returns. According to analysis by K33Research, the launch of spot Bitcoin ETFs may attract about 100,000 BTC in new investments within a few months, which is equivalent to about $3 billion in new investments at current prices.
On a related note, Grayscale has filed a registration statement with the U.S. Securities and Exchange Commission in an attempt to convert its Bitcoin Trust into a spot ETF. The move speaks volumes about Grayscale's confidence in its efforts to yield positive results.
Meanwhile, amid the judicial fallout, the SEC appears to be backtracking on its overall anti-crypto stance. Consider that the SEC has now dropped its lawsuit against Ripple. The U.S. Securities and Exchange Commission had alleged that Ripple’s XRP token was a security and that the company violated securities laws by regularly releasing XRP through institutional and programmatic sales to fund its operations. However, the court rejected the SEC's overly aggressive interpretation of the "Howey Test" - the standard used to determine whether an economic transaction constitutes a sale/purchase of securities. In its non-binding decision, the court stated that XRP tokens sold through exchanges cannot be considered securities, clearing up a lot of confusion surrounding the regulation of Bitcoin and Ethereum.
While Bitcoin's recent strength is a welcome development for investors stuck in bear market purgatory, be aware that the world's top cryptocurrency could still pull back 25% to 38% if past precedent holds.