More than 15 years after the advent of bitcoin as an investable asset, institutional investors have begun exploring cryptocurrency via bitcoin ETFs, which gained momentum after the US Securities and Exchange Commission (SEC) green-lit them in January.
Following the SEC’s vote of confidence, big institutions like sovereign wealth funds, hedge funds, and pension funds, which were previously reluctant to open their own wallets to custodians, were given access to a less risky way to invest in crypto, a wrapper (ETF) which circumvents the need to hold the physical asset.
This burgeoning demand has helped propel the price of bitcoin, which reached record highs of some US$73,000 this year. Moreover, the 11 SEC-approved offerings on the market saw approximately $12.1 billion in total inflows by the end of the first quarter of 2024, according to BitMEX Research.
Sentiment has since tempered, with bitcoin’s price falling 2.2 per cent in the last month to US$70,493, with all eyes turning towards the much-discussed halving event, set to take place in April.
In this programmatic event that takes place every 210,000 blocks or approximately every four years, the amount of bitcoin miners receive for processing a block of transactions effectively halves.
This helps maintain bitcoin’s absolute supply at a limit of 21 million, contrasting central bank-managed fiat currencies that have mostly been subject to expansive monetary policy and new money supply.
“The halving event is significant because it directly impacts the supply side of bitcoin’s economics, reducing the rate at which new bitcoins are created and, therefore, the amount of new supply entering the market,” explained Benjamin Celermajer, director at crypto and digital-asset focused asset manager Magnet Capital.
In previous years, bitcoin experienced substantial price increases following the 2012 and 2016 halvings, rising by 284 per cent and 559 per cent, respectively.
“Historically, halving events have preceded significant bull runs in the bitcoin market,” Celermajer observed.
“Once [the halving] occurs, the changes to the supply dynamics of bitcoin result in positive price pressure. An increasing bitcoin price captures retail and media attention, resulting in more demand for bitcoin and thus starts the bull market.”
Reflecting on the trend, Global X Australia’s chief executive, Evan Metcalf, agreed that historic data indicates a positive price trend could be on the cards.
The firm’s Global X 21Shares Bitcoin ETF and Global X 21Shares Ethereum ETF remain the only spot cryptocurrency ETFs in Australia and have been listed on Cboe since 2022.
In the last two months, Global X 21Shares Bitcoin ETF has been among the top performers identified in Betashares’ monthly ETF review, returning 46.9 per cent in February, and a more modest 13.2 per cent in March.
“Based on historic data around halving events in the past, it’s been positive for price, so we’d expect positive sentiment heading into the halving,” Metcalf told InvestorDaily.
“We think there’s potential to see some good price movement in the months after that as well. Generally, it’s been limited supply, but there are other dynamics in these markets at play.”
Among these, additional factors in play have been huge inflows of institutional support, which have bolstered market demand dynamics and already impacted the spot price of bitcoin in 2024.
Due to this, Magnet Capital’s Celermajer believes there could be a lesser impact from the halving than previous years.
Bitcoin’s performance over the next 12 months will continue to be driven mostly by ETF demand, he said.
“Whilst we anticipate the economic changes to bitcoin to result in similar supply side pressures as previous halving events, the impacts of the demand side changes from the ETF in the months prior to the halving are more significant. Typically the price of bitcoin 180 days leading up to each historic halving event has also been highly volatile,” he elaborated.
“As the market matures and more institutional investors enter the space, the dynamics around halving events could evolve. Institutional investors, with their substantial capital and strategic investments, may respond differently to halving events than retail investors have historically, potentially moderating the volatility historically associated with these milestones.”
Such investors are generally considered to be portfolio allocators rather than price speculators, he explained, and in turn, they may shy away from chasing price post-halvings as retail investors have done historically.
Rather, if the price increases too fast and bitcoin becomes overweight in portfolios, institutional allocators are likely to rebalance and sell to get their allocations back within target.
“To me, this might result in less boom-bust cycles, particularly around the halving,” he said.
“Many institutional investors still can’t access bitcoin ETFs as they are not approved by their platforms or investment committees. As such, they are likely to continue to allocate to bitcoin over the coming 6–12 months as they become familiar with the asset and as it gets ’switched on’ for them.
“I think the halving will not really factor into their allocation considerations, more so their ability to allocate will.”
Additionally, he forecast prices to be less volatile as the market size of bitcoin continues to grow.
“Moving a $10 trillion market is different to moving a $500 billion market,” Celermajer told InvestorDaily.
