On March 4, the flagship crypto added 8% to its value, reaching $67,310. At the beginning of the year, it was changing hands for $44,000. It peaked at around $69,000 in November 2021.
What's behind the rally? According to cryptocurrency market insiders, part of the explanation for its spectacular growth is a rising demand for the asset on spot Bitcoin exchange-traded funds (ETFs). The funds let investors buy crypto in a way that's less risky than ever before, attracting a huge influx of cash in 2024. Bitcoin can now be treated as an uncorrelated asset, which makes it very attractive to investors in terms of portfolio diversification, market strategist Joel Kruger told CBS MoneyWatch.
Direct exposure without holding Bitcoin
A spot bitcoin ETF gives investors direct exposure to Bitcoin without actually holding the asset. Spot Bitcoin ETFs differ from regular Bitcoin ETFs in that Bitcoin is the underlying asset, not Bitcoin futures contracts. The companies managing spot Bitcoin ETFs issue shares of their own Bitcoin holdings, which they buy on crypto exchanges or from other holders. Spot Bitcoin ETF shares are listed on a traditional stock exchange.
Since the US Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs in January, customers of the funds deposited $7.35 billion into them, CBS reported, citing Bloomberg data.
The rally began back in 2023
However, the approval of the funds isn't the only reason for Bitcoin's price rally. It started months earlier, in 2023. Its price surged to an almost two-year high of around $41,000 in December. At the time, analysts attributed the increase to two factors apart from expectations that the SEC would approve the spot ETFs: the upcoming halving and anticipation of Fed rate cuts. When Bitcoin halving occurs, the reward for mining the crypto drops by 50%.
Experts warn that Bitcoin's impressive rally doesn't make it any less volatile. It may skyrocket, but it won't necessarily stay high. It is heavily influenced by sentiment, which can be positive or negative.
Bitcoin's revival is welcomed by crypto traders and investors, whose assets plummeted after FTX collapsed in 2022. As the biggest cryptocurrency by market cap and trading volume, financial analysts often look to Bitcoin to gauge the crypto market's overall health.
Correlation with stocks
Stock indexes such as the S&P 500, Nasdaq, and the Japanese Nikkei are at record highs as well, Reuters wrote. The correlation with tech-heavy Nasdaq is especially strong. The stock exchange is currently making a new record, which means crypto is going to continue to do well. According to financial analyst Brent Donnelly, quoted by Reuters, Bitcoin is a liquidity gauge and high-volatility tech proxy. He drew parallels to 2021 when crypto and stocks were both going up.
Bitcoin's total market cap was $1.29 trillion on March 4, according to CoinGecko data, which is more than triple the market cap at the end of 2022 ($320 billion), when crypto winter was at its zenith.
Other record highs
The 11 recently approved spot Bitcoin ETFs are managed by crypto-focused platforms like GrayScale and legacy asset managers such as BlackRock. BlackRock also hit a record, becoming the fastest fund in history to reach AUM of $10 billion. Publicly traded stocks with close connections to Bitcoin have outperformed the broader market in 2024, Forbes Magazine wrote. Shares of leading Bitcoin mining firm Marathon Digital, crypto exchange Coinbase, and Bitcoin investment firm MicroStrategy each hit multiyear records this year.
Bitcoin will reach a new record this week
Bitcoin will reach a new record before the end of this week according to Markus Thielen, head of research at 10x, CoinDesk reported. Thielen said it was always important to follow price action during the weekend as well.
There have been attempts to liquidate leveraged long positions. Over the past month, the number of Bitcoins held on exchanges has dropped by 63,000. In this time frame, Coinbase’s balance dropped from 400,000 to 372,000.
Spot Bitcoin ETFs in the US do not solely dictate the market. Last week, BlackRock opened a spot bitcoin ETF in Brazil. In South Korea, Bitcoin trading volumes reached $8 billion per day for five days straight. Previously, Bitcoin trading volume was less than $1 billion.
Inflows into BlackRock slowed last week, and outflows from Grayscale’s GBTC product increased. Thielen expects inflows into the BlackRock product to regain momentum this week. Investors believe Bitcoin’s price will keep increasing, so inflows are not drying up. Bitcoin will surge again if outflows from Grayscale drop to below $100 million, concluded Thielen.
Risk warning
There are indications that Bitcoin may not be the crypto market health gauge it's widely purported to be. While it's approaching its all-time high, the crypto market's overall capitalization is far off from its late 2021 levels. It's currently $2.55 trillion, compared to over $3 trillion at the end of the last successful year.
Bitcoin's share of the crypto market has grown from below 40% to about 50% over the last two years, making up for the disappearance of multiple prominent coins. FTX's cryptocurrency FTT's market value peaked at just under $10 billion in 2021. It lost a lot of its value after FTX went bankrupt. Binance Coin (BNB) has lost 40% of its value since November 2021 as its issuer, Binance crypto exchange, struggles with legal issues. Dogecoin, the meme coin enjoying Elon Musk's unwavering support, has also lost around two-fifths of its value since November 2021, when its market cap was almost $40 billion.
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