A Quick Recap of Bitcoin Price Trends
Bitcoin falling again! Last Wednesday, a move made by the U.S. Securities and Exchange Commission (SEC) sent Bitcoin tumbling down below the $7,000 mark after it had begun to recover some of its massive value loss in recent weeks. In December 2017, Bitcoin reached an all-time record high of $20,000. That rise sparked speculation on a vast level among investors, many of whom were trying this out for the first time. It wasn’t long, however, before the cryptocurrency market as a whole, and Bitcoin, in particular, was struck by a downward spiral where it reached a value of around $14,000 per coin.
Bitcoin Falling Again
Since that time in the final days of 2017, Bitcoin has never seen a surge like the one that preceded the fall. A few weeks later, a number of decisions and statements by several governments prompted a further fall which weighed down even more severely on the crypto market. Some of these statements implied imminent crackdowns by the Chinese[1] and the South Korean governments on the crypto industry[2]. The former being one of the largest mining centers worldwide, and the latter being among the most prosperous crypto markets, these statements brought about a major fall. By February, Bitcoin was trading at a little over the $7,000 mark, and for a brief period in June, it even fell below the $6,000 mark.[3]
In July, Bitcoin made a 30% rise, reaching a value of almost $8,400. Now, Bitcoin is trading below the $7,000 mark again.
Why the Sudden Fall?
There are several factors that brought about this decline in Bitcoin’s value, but if there’s a single event to bear the bigger part of this responsibility, it is definitely the SEC’s delaying of its decision with regard to the establishment of a Bitcoin-based ETF that was proposed by the VanEck-SolidX Bitcoin trust.[4]
What is an ETF?[5]
An exchange-traded fund, or ETF, is a fund that is based on a certain asset; in this case, it is based on Bitcoin. The fund operates as an index that keeps track of the asset’s value, and so investors are able to speculate on this asset without actually having to buy it. Their investment is rather tied to the index itself. This differs from a mutual fund in that it is listed on exchanges and can be purchased directly by the investor without having to resort to a third party that would charge large premiums. At the moment, there aren’t any ETF’s in the Bitcoin market, although there are a few similar products, like, for example, the Bitcoin Investment Trust (NASDAQOTH: GBTC). These, however, charge huge premiums and management fees.[6]
The launching of a Bitcoin-backed ETF would have been a major attraction for institutional investors, seeing as how a single share would be worth 25 Bitcoins.[7] According to the CEO and co-founder of the BitMEX cryptocurrency exchange, Arthur Hayes, the approval of an ETF can possibly boost Bitcoin’s value up to $50,000 per coin.[8]
That’s the third time for VanEck alone to propose creating such a fund, twice of which were met with the SEC’s rejection, and the third one is now pending an approval which will supposedly be decided upon in September. Other prominent Bitcoin tycoons have also made their attempts to found an ETF. Cameron and Tyler Winklevoss (aka The Winklevoss Twins), for example, tried to establish their own fund last year. The proposal for the Winklevoss Bitcoin Trust was disapproved by the SEC as well. According to a statement by the SEC back then, the agency was concerned with the Bitcoin market’s proneness to manipulation.[9]
Why Do Institutional Investors Need An ETF?
As I mentioned above, the only available funds at the moment are ones that offer their services at a high premium and high management fees. That means that there isn’t a cost-effective way for entities that want to invest huge sums of money in the cryptocurrency. The only other option is buying single units through an exchange platform or a digital wallet. However, when investment is made on such a major scale, these solutions would neither be feasible nor efficient. In addition to that, a lot of investors have security concerns with regard to these digital platforms, where a hack attack or a collapse can do away with their investments. On an institutional level, the losses would be utterly catastrophic.[10]
The approval of the VanEck-SolidX ETF, or any other legitimate ETF for that matter, is expected to bring in massive investments by institutional players who feel incentivized by the fact that an ETF would operate under the eyes of the SEC, which would act a safeguard for them.
What Is Next for Bitcoin?
At the moment, the market sentiments are pretty mixed. On the one hand, major players like Goldman Sachs, for example, believe that the price will continue to drop. The postponement of the SEC decision already wiped off $9 billion of the currency’s market cap. In its 2018 mid-year report, the bank referred to the current atmosphere in the cryptocurrency market as a “crypto mania.” In the report, Sharmin Mossavar-Rahmani, Goldman’s chief investment officer of the private wealth management group, said this:
“We expect further declines in the future given our view that these cryptocurrencies do not fulfill any of the three traditional roles of a currency.”[11]
In case you don’t know, the three roles he’s referring to are[12]:
- Medium of exchange
- Store of value
- Unit of account
Up until now, Bitcoin has proven incapable of maturing past its volatile phase and into a phase where the buyer and the seller can be certain, at least to some degree, of the coin’s near-future value.
On the other hand, there are more optimistic predictions among other analysts. For example, Forbes contributor Naeem Aslam expected in April that Bitcoin would reach a market value of $35,000 by the final quarter of this year, which we are less than 2 months away from.[13] If the SEC decides in favor of the VanEck-SolidX ETF in September, this can carry some positive prospects for Bitcoin and the crypto market as a whole. There are other mainstream financial institutions that are also attempting to make moves that will bring Bitcoin more and more into the regulated realms of the financial markets. For instance, despite their negative predictions, there have been rumors for the past months that Goldman Sachs is setting up its own Bitcoin trading desk.[14]
What exactly will happen to Bitcoin in the coming months is almost completely unpredictable. However, it appears that Bitcoin is becoming more and more reliant on the mainstream financial institutions and regulatory agencies in order to restore its vigor. With global liquidity drying up, it has been pointed out that a dramatic price increase even with a successful ETF launch, is unlikely. The market is dominated by giant ‘whales’, plenty of fanatics and the remainders speculative trader in search of quick buck stable long-term funds and demand nowhere to be found. The demand from important countries such as Japan and South-Korea has substantially cooled down and improvement is nowhere to be seen if you talked to local traders.
That being said, you should watch out for the SEC’s decision in September, as well as the steps taken by the major institutions for or against Bitcoin. Increased volatility is likely that a savvy trader and speculator can trade on both sides.
[4] https://www.cnbc.com/2018/08/08/bitcoin-price-falls-after-sec-postpones-key-etf-decision.html
[6] https://www.fool.com/investing/2018/08/08/bitcoin-is-plunging-on-wednesday-heres-why.aspx
[7] https://www.forbes.com/sites/cbovaird/2018/08/07/bitcoin-prices-drop-after-sec-postpones-etf-decision/#6a9ee52c2e67
[8] https://www.fool.com/investing/2018/07/02/could-this-1-thing-propel-bitcoin-to-50000.aspx
[9] https://www.cnbc.com/2018/07/26/winklevoss-twins-bitcoin-etf-rejected-by-sec.html
[10] https://www.fool.com/investing/2018/08/08/bitcoin-is-plunging-on-wednesday-heres-why.aspx
[11] https://www.goldmansachs.com/what-we-do/investment-management/private-wealth-management/intellectual-capital/isg-midyear-outlook-2018.pdf
[12] https://www.cliffsnotes.com/study-guides/economics/money-and-banking/functions-of-money
[13] https://www.forbes.com/sites/naeemaslam/2018/04/10/bitcoin-the-harder-the-fall-the-higher-the-rise-35k-by-q4/#4b8fc9155410
