Traditional institutional investors are beginning to make waves in the world of listed digital assets. In a bold move that reflects the changing landscape of finance, some of the most established asset managers are now filing to launch spot Bitcoin Exchange-Traded Funds (ETFs). This development marks a significant shift in the perception and acceptance of digital assets within the mainstream investment community that are now ready to explore
new avenues of diversification and returns.
No other than Blackrock, the world's leading asset manager, showed its support for digital assets by filing for a spot Bitcoin ETF in July 2023. Following this, nine more ETF proposals were submitted by well established asset managers, each awaiting regulatory approval (refer to the table below for respective deadlines). Before these filings and in July of 2023, the U.S. Securities and Exchange Commission (SEC) had taken an extremely conservative stance
against approving a spot Bitcoin ETF. The opposing arguments of the SEC were viewed by many within and outside the industry as intellectually dishonest. As the year progressed, this perspective was validated by higher U.S. courts. In August 2023, digital asset manager Grayscale successfully overturned the SEC's stance in its battle to convert its trust into an ETF, forcing the SEC to review its decision.
At present, it is highly challenging for institutional investors to make substantial investments in the digital asset sector due to the lack of appropriate financial instruments. Current investment instruments are futures-based, whereas a spot-based ETF will provide direct ownership, low counterparty risk, and no hidden costs. Now that we approach a resolution to the global regulatory ambiguities surrounding digital assets, the door is opening for significant institutional investment in the field. This means that once a spot Bitcoin ETF is approved it is likely to establish a price floor for digital assets. This verification of the digital asset class will spill-over and accelerate both adoption and innovation within the broader industry.
Image 1. Source: Bloomberg. Bloomberg’s Eric Balchunas: “We are upping our odds to 75% of spot bitcoin ETFs launching this year (95% by end of '24). While we factored Grayscale win into our previous 65% odds, the unanimity & decisiveness of the Court’s ruling was beyond expectations and leaves SEC with "very little wiggle room".
In 2022, the crypto industry faced its most significant deleveraging event to date. This downturn was fueled by increasing interest rates and the cessation of easy money policies by Central Banks, leading to a sharp decline in digital asset values. Adding to the turmoil, November saw the collapse of FTX, one of the leading digital asset exchanges, due to the mishandling of customer funds. This set off a wave of year-end selling as global clients
sought redemptions and major market players reduced their stakes in the sector.
During this widespread downturn, high-quality digital assets were sold off just as aggressively as their lower-quality counterparts. This creates a considerable opportunity for knowledgeable investors. The prices of many digital assets have plummeted—some by as much as 95%—from their peaks, even though technological advancements in the sector continue to grow. What we're witnessing appears to be a textbook case of behavioral finance: investors are overvaluing short-term risks while undervaluing the industry's long- term growth prospects. After witnessing a market capitulation driven by price in 2022, we anticipate that the second half of 2023 will mark the end of time-based capitulation, paving the way for smart money to position itself for a new phase in the market.
Image 2. Source: TradingView. In 2022 we saw price capitulation after an explosive growth of the industry in the years before. In 2023, most of this selling pressure has been absorbed by smart money, paving the way for a new market cycle.
A highly anticipated industry catalyst is expected to occur in April 2024: the Bitcoin halving. The Bitcoin halving is an event that happens approximately every four years, reducing the reward for mining new blocks in the Bitcoin blockchain by half. After the halving, the rate of inflation of Bitcoin is reduced by 50%. This results in a meaningful reduction in selling pressure from the largest net-sellers in the Bitcoin markets: miners. Miners are often significant sellers in the market, as they need to sell Bitcoin to cover costs such as electricity and hardware. The Bitcoin halving essentially reduces the amount of Bitcoin hitting the market on a daily basis. This distortion of supply-demand dynamics has historically led to a start of a new market cycle.
Whereas we expect digital assets other than Bitcoin to perform substantially better, Bitcoin does typically lead the market at the beginning of a new cycle. A renewed interest in the space, combined with an initial rotation of capital up the risk curve of digital assets will result in a flywheel effect that kick-starts a new market cycle. At M11 Funds, we believe our deep understanding of the technology and long history in the sector allows us to construct a portfolio of digital assets that will outperform the benchmark.
Image 3. Source: TradingView. The Bitcoin halving event, historically kick-starting new digital asset cycle, is expected to occur in April 2024.