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For months, Wall Street investors Bitcoin (BTC -0.20%) As soon as the SEC finally approves a new spot price Bitcoin ETF, it will skyrocket. But that didn’t happen. In fact, quite the opposite. Bitcoin’s price has now fallen to $40,000, and there are growing concerns that it could fall further.
This is probably a little off-putting, especially for first-time crypto investors who expected to become Bitcoin millionaires overnight. But this is actually part of a pattern we’ve seen many times with Bitcoin, and there’s no need to panic now. Let’s take a closer look.
Bitcoin and tactical asset allocation
There has been a lot of media coverage about the new spot-price Bitcoin ETF, including an exhaustive list of possible reasons why Bitcoin prices have fallen since the SEC’s approval. One possible explanation relates to the concept of tactical asset allocation. It simply refers to the process of reallocating funds between different asset classes to take advantage of short-term market conditions.
Image source: Getty Images.
In layman’s terms, this simply means that funds are being shuffled between various Bitcoin investment products as people look for the best way to get exposure to Bitcoin. Unfortunately, this process is causing downward pressure on Bitcoin’s price.
If you want to buy Bitcoin now, keep in mind that people have a variety of options. They can invest in Bitcoin proxy stocks (such as Bitcoin mining companies). They can invest in Bitcoin futures contracts. They can buy futures-based Bitcoin ETFs. They can buy Bitcoin directly on the spot market via crypto exchanges. And they can invest in a new spot-priced Bitcoin ETF.
For Bitcoin’s tactical asset allocation theory to make sense, certain things would be expected. We would expect to see people selling their Bitcoin proxies for more direct exposure via spot-priced Bitcoin ETFs. Something like this happened. We would expect to see people moving from high-cost futures Bitcoin ETFs to low-cost spot price Bitcoin ETFs. Something like this happened. And we would expect Bitcoin trading volume on crypto exchanges to decline as people buy ETFs instead. This also seems to be happening.
From my perspective, this explanation makes a lot of sense if you assume that most investors are rational and are looking for the best way to invest in a particular asset. Moreover, I find this explanation oddly reassuring. Because that means nothing has changed in the grand macro proposition of Bitcoin adoption. This means there is no significant change in Bitcoin’s long-term growth prospects. In fact, the only downside is that there may be less “new” money flowing into Bitcoin than expected. Instead, it just “recycled” money from other Bitcoin products.
Bitcoin historical evidence
Still not convinced? Now, consider the historical evidence for Bitcoin and similar types of product launches.
One of the best graphics I’ve seen in the past two weeks appeared on CNBC. As Markus Thielen of 10x Research pointed out, the same pattern occurs with every major launch of a Bitcoin-related financial product. A lot of early hype leads to a spike in Bitcoin prices, followed by a quick downward correction on real news.
This happened with the first Bitcoin futures contract launched in December 2017. That happened in April 2021 with the initial public offering (IPO) of a cryptocurrency exchange. coinbase global (coin 3.46%), brought Bitcoin trading to the average investor. That happened in October 2021 with the launch of the Bitcoin Futures ETF. And that’s what’s happening with the launch of a new spot-price Bitcoin ETF in January 2024. If you take a Bitcoin trading chart and highlight these dates, the trend will look like this: Unmistakable. There is a peak after listing, followed by a decline. And long-term price increases will continue even after a pause.
You could argue that correlation doesn’t mean causation, but there seems to be a strong pattern here, right? This means that as soon as a new way to invest in Bitcoin comes out, people It suggests that funds will start to be reallocated, which will cause short-term price declines.
Buy a Bitcoin push
Simply put, you should buy the dip. In my eyes, Bitcoin under $40,000 is a solid investment opportunity. Based on my analysis, it is simply impossible that the continued surge in new retail and institutional capital into Bitcoin will not help support its price. And if many investors decide to allocate just 1% of their portfolio to Bitcoin, that will provide long-term price support. And thanks to new spot price ETFs, it’s easier than ever.
That’s why I remain bullish on Bitcoin. The process of democratizing cryptocurrencies for the average investor continues, and spot-price Bitcoin ETFs are a welcome new addition. Admittedly, the past two weeks have been chaotic, but I am more convinced than ever that investors need to hold Bitcoin for the long term and learn to embrace its volatility.
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