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New Bitcoin All-Time Highs?

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The SEC allows a bitcoin-related ETF launch … strong technical action for bitcoin via a golden cross … where we are in bitcoin’s cycle, and what it could mean for returns

It’s finally here – a U.S.-based bitcoin ETF.

This morning, the ProShares bitcoin-linked exchange-traded fund made its official debut with the ticker (BITO). As I write mid-day, it’s up 2.3%.

The most significant part of this story is that the SEC didn’t block the launch as it has done for years with prior bitcoin-linked ETF efforts.

This is a major sign of crypto adoption and could usher in a new wave of capital into the sector.

From ProShares CEO, Michael Sapir:

We believe a multitude of investors have been eagerly awaiting the launch of a bitcoin-linked ETF after years of efforts to launch one.

BITO will open up exposure to bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider … or are concerned that these providers may be unregulated and subject to security risks.

***We love what this ETF signifies, but it’s not the best way to own bitcoin

BITO doesn’t invest directly in bitcoin. Instead, it invests in bitcoin futures. This is part of the reason why Gary Gensler, the Chairman of the SEC, has allowed it.

A bitcoin futures contract is an agreement to buy or sell bitcoin at a future date at an agreed-upon price. So, BITO will track cash-settled futures contracts, not the price of bitcoin itself.

And as you might expect, dealing with futures means a futures market and its related market participants – basically, middlemen. This means added costs.

Matt Hougan, CIO of Bitwise Asset Management pegs the all-in cost of a futures-based ETF like BITO in the 5% to 10% range (this includes the futures-related phenomenon called roll yield, which is unimportant to explain for today’s purposes).

This is one of the biggest reasons we don’t recommend BITO or other futures-linked ETFs as the best way to play bitcoin – they don’t truly track bitcoin’s market price, and they come with added expenses.

That said, we love what this ETF means for mainstream bitcoin adoption.

Plus, there are three additional bitcoin futures ETFs hot on BITO’s heels from Valkyrie, Invesco, and Van Eck.

The real feather-in-the-cap that the crypto community wants is an ETF that invests directly in bitcoin, or another cryptocurrency. While Gensler has opposed this idea to date, many investors hope that BITO will help pave the way for an eventual change of heart.

***If history repeats itself, look for a surge from the entire crypto sector

For these details, let’s turn to our crypto specialists, Luke Lango and Charlie Shrem of Crypto Investor Network. From their weekly update on Saturday:

Bitcoin appears to be just days away from a “golden cross” moment – where its 100-day moving average crosses above its 200-day moving average in a sign of growing buying pressure.

The last few times Bitcoin has done this, the price of Bitcoin proceeded to skyrocket over the next few months.

Below, you can see this golden cross has now barely happened.

The blue line is bitcoin’s 100-day simple moving average. It’s climbing and has just pierced bitcoin’s 200-day moving average, in red.

Traders view such a golden cross as a significant bullish signal.

bitcoin's chart showing a golden cross of moving averages

Source: StockCharts.com

Luke and Charlie’s optimism isn’t limited to technical factors. There are multiple tailwinds behind bitcoin and the broader sector right now.

Back to their update:

On the adoption front, more and more retailers are pivoting to accept crypto payments. The latest additions are movie theater chain AMC, clothing retailer PacSun, and website developer Wix.

On the legal front, the El Salvador “Bitcoin as legal tender” experiment has experienced enormous early success, with more folks than expected using Bitcoin on a regular basis either for purchases or remittances. Stateside, the SEC is set to clear the way for Bitcoin futures trading by Monday. Off in Europe, the Ukraine has legalized cryptos, while Russia is taking a surprisingly pro-Bitcoin stance.

On the funding side of things, more money that ever is pouring into the crypto markets. Literally – more money than ever before. Funding for blockchain companies and projects soared to a record-high $6.6 BILLION in the third quarter of 2021. That is up 28% quarter-over-quarter and 563% year-over-year.

***Pulling back, some experts are suggesting we’re nearing the end of this crypto cycle, which would mean heightened gains before a correction

Bitcoin and the crypto sector move in cycles, similar to many other assets.

If we look at bitcoin’s history, its market cycle – from any given peak, through its ensuing trough-low-point, and then back to a new, higher peak – usually lasts roughly four years.

There was the bitcoin 2013 bubble, the bitcoin 2017 bubble, and then where we are today. Now, I’ll quickly add there’s some debate as to whether bitcoin hitting $65K earlier this spring was, in fact, the top of this current cycle.

While anything is possible, given the flows into bitcoin recently, this is unlikely – especially given how close we are to $64K again, plus the bullish indicators Luke and Charlie highlighted earlier.

Plus, bitcoin’s halvenings (when the reward that miners receive for mining bitcoin gets reduced by half), tend to mark the middle of bitcoin’s cycle. The last halvening was in May 2020, suggesting more life in this cycle – and the last part of the cycle is generally the most explosive.

This view was reflected by Raoul Pal, a former hedge fund manager and the founder of the respected investment shop, Real Vision. He’s also at the cutting edge of the crypto/digital space sector.

From MarketWatch:

But as for crypto direction, (Pal) thinks “everything is about to start breaking out now and we’ve seen it before. We know the pattern…this October, November, December, January, February, March is going to be the point where it’s almost impossible to lose money by owning anything,” he said, pointing to this bitcoin chart:

Price path bitcoin may take if it mirrors its 2013 runup

Source: Bloomberg

Bitcoin’s price versus the 2012-13 bull market

Pal said bitcoin could hit $250,000 if that same pattern repeats, but he also sees upside into next year as institutions tend to allocate at quarter-end.

Frankly, I get nervous when I read “it’s almost impossible to lose money by owning anything.” But that’s in keeping with the irrational euphoria that tends to mark the end of a cycle.

Yes, a painful correction follows market tops, but if Pal (and Luke and Charlie) are correct, we still have the euphoric bullish phase in front of us.

Here’s Luke, speaking to this:

Folks: Everything looks good in the crypto markets right now.

To be sure, it is this sense of euphoria that tends to characterize “bubbles,” and so we want to caution you against getting too bullish on any one asset, even cryptos.

However, everything we’ve analyzed points to green shoots for Bitcoin and altcoins over the next few months.

We’re bullish. For as hot as Bitcoin is right now, we think our portfolio of altcoins will get even hotter as this latest bull market broadens out over time.

Bottom-line, history suggests we’re approaching the end of this cycle, which would mean the most explosive gains. It will likely be volatile, but we’re looking for a strong ending to 2021.

We’ll keep you up to speed here in the Digest.

Have a good evening,

Jeff Remsburg