Why the Bitcoin Bull Run?

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But there has been a noticeable change in market sentiment in the past few weeks. From the cyclical low of $16,800 in December 2022, Bitcoin prices have since more than doubled to its current price above $34,500. Since FTX founder Sam Bankman-Fried, and by implication the entire crypto market, went on trial at the beginning of October, BTC has swum against the tide and risen by over 25 percent. So, what is going on? The first explanation is that the Securities and Exchange Commission (SEC), whose Chairman Gary Gensler has been waging a regulatory war on crypto, seems to be on the cusp of accepting the inevitable. Market rumors are that the SEC will soon approve Bitcoin (and perhaps Ethereum) exchange-traded funds (ETFs), paving the way for deep-pocketed institutional money managers and their crypto-curious clients to invest in BTC through their brokerage accounts. If institutional money is unshackled and able to more easily invest in crypto, demand will swamp available supply of BTC, and prices will rise further. This explanation is supported by the fact that discount to net asset value of the Grayscale Bitcoin Trust (GBTC), one of the largest institutional investors in BTC and thus a bellwether of sentiment, has narrowed from over 44 percent as recently as June to less than 15 percent today. This plausible explanation may be valid yet may not tell the whole story. Bitcoin, like gold, is touted as both an inflationary hedge and as a safe haven in times of market dislocation. While gold has stood the test of time over centuries, newcomer Bitcoin has only lived through one major crisis (i.e., the COVID-19 panic). Until recently, both gold and BTC prices—which were expected to rise under the circumstances of rising inflation and bond yields—have fallen. An alternative explanation is that geopolitical upheaval, formerly represented by the conflict in Ukraine but now centered on the Israel–Hamas war—and its ability to evoke fears of World War III and Armageddon—is renewing interest in the leading cryptocurrency. This, along with the fact that the deterioration of the U.S. fiscal position appears to be accelerating at an accelerating rate, is stimulating interest in an unorthodox safe haven asset. With total U.S. national debt now at $33.7 trillion and growing by some $20 billion per day, combined with a $1.7 trillion federal deficit likely to grow as the Biden administration supports not one but two foreign wars, the U.S. dollar appears on shaky ground. Equity markets are arguably overvalued and ready for a reset, while bonds appear to have already entered into what may be a long bear market as yields continue to rise. The traditional safe haven of cash, while now yielding a nominal 5 percent, may actually be value destructive if real inflation is set to remain higher for longer. So, in this environment of uncertainty, Bitcoin may be benefiting, even if only as a risk-diversification play. There are other technical reasons for Bitcoin’s appreciation. Bitcoin’s mining rewards are soon to be cut in half, which has the effect of limiting new supply and thus supporting prices. The “halving” event, expected to come in April 2024, has historically led to strong price appreciation and long bull runs. Regardless of underlying reasons, if market sentiment has indeed shifted, and there is a substantive push by institutional capital into Bitcoin, the price of BTC may be poised to not just match but substantially exceed its previous highs, even as interest rates continue to rise. I remain skeptical of crypto’s long-term ability to overcome what is massive regulatory bias against its success. Governments around the world hate what crypto values (e.g., decentralization, privacy, autonomy, and disintermediation of government issued fiat currencies) represent. Over time, governments around the world will find a way to constrain crypto’s wide-spread adoption and use. They will use central bank-issued digital coins (CBDCs) as a blockchain-enabled alternative controlled by the surveillance state. Nonetheless, in the short to medium term, it feels as though crypto’s long winter may be coming to an end. However, gains may not be equally distributed. The winners and losers may have already been sorted. Bitcoin dominance, the ratio of BTC market capitalization to all other cryptocurrencies, has risen from 39 percent in January 2022 to over 54 percent today. I am, therefore, an investor in the medium term in both BTC and GBTC. I can’t but help believe, however, that over the long run, hard and real assets represent the safest haven amid the chaos of the shifting geopolitical landscape.

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