Bitcoin’s Turning Point: BlackRock ETF, 2024 Halving, and The 4 Year Cycle | Weekly Digest

June 19, 2023

Welcome to another Crypto Weekly Digest brought to you by VirtualBacon.

One story that has caught the attention of the crypto world is the announcement of financial titan BlackRock applying for a Bitcoin Exchange-Traded Fund (ETF). This week, we delve into the history of past ETF rejections, the consequences of those decisions, and the potential implications of BlackRock's entry in the current climate.

Also, we revisit the fundamental concept of Bitcoin's quadrennial 'halving,' shedding light on its impact on Bitcoin's 4-year cycle and how it ties into the broader crypto bull and bear cycles.

What is a Bitcoin ETF?

Bitcoin exchange-traded fund (ETF) enables investors to participate in Bitcoin's market performance without owning the underlying asset directly. This approach simplifies the investment procedure by eliminating the need for individuals to register with a cryptocurrency exchange or manage cryptocurrency wallets.

The main benefit of a Bitcoin ETF is that it tracks the price of Bitcoin which allows users to profit from Bitcoin’s upside potential without having to sign up for an exchange and acquiring real Bitcoin.

Bitcoin Futures ETFs are Not Good Enough

A Bitcoin futures ETF is an exchange-traded fund that owns Bitcoin futures contracts, which are an agreement in which one will buy or sell Bitcoin at a specified price on a pre-determined date.

Futures contracts are generally used for speculative or hedging purposes. However, a futures ETF doesn’t involve investing in Bitcoin at its spot price, which is why some enthusiasts might not consider the offering a “real” crypto adoption.

While there are many Bitcoin Futures ETFs in the traditional markets today, they all suffer from these same issues:

  1. They do not hold real Bitcoins in the contract agreements, which defeats the purpose of investing in a hard asset.
  2. They do not contribute to the real supply and demand mechanics of the Bitcoin economy, but only adds speculation volume on both the long and short side.
  3. They are not fit for long-term holding due to periodic portfolio rebalancing necessary for maintaining exposure, and large amounts of fees to keep the futures positions open. Thus, they often brand themselves with the term "strategy"

Bitcoin Spot vs Futures ETF - The Key Missing Piece

Like a futures ETF, a spot Bitcoin ETF allows for investing in Bitcoin without dealing with a crypto exchange, potentially resulting in lower fees and a more simplified process. However, the distinguishing factor is that a spot ETF invests in Bitcoin at its immediate market price.

A spot Bitcoin ETF offers similar streamlined investment opportunities as a Bitcoin futures ETF, but it enables users to invest in Bitcoin at its current market price rather than a future predicted value.

In essence, a spot ETF invests in Bitcoin at its current price, implying that investors essentially hold Bitcoin within the fund, akin to owning a share of stock. Many see a spot ETF as a more authentic investment method since it involves actually holding Bitcoin.

The approval of the first Bitcoin Spot ETF also significantly changes the mechanics of the Bitcoin markets, since for the first time ever, institutions can easily invest in Bitcoin and actually be assured there is real Bitcoin backing the investment. All Bitcoin Spot ETF contracts are backed by real Bitcoin 1-to-1.

Bitcoin Spot ETFs: The Ongoing Struggle for Spot Approval

While the crypto space has celebrated several U.S. SEC-approved Bitcoin futures ETFs that trade on equity markets, the acceptance of a spot Bitcoin ETF remains elusive. This persisting denial stems from the SEC's fears of potential fraudulent activities and market manipulation.

Dating back to 2016, the SEC's skepticism began when it rejected the Winklevoss twins' proposal for a spot Bitcoin ETF, citing a need for stronger investor protections and concerns about price manipulation. Subsequent proposals, including those from ARK Investment and 21Shares, have faced similar rebuffs.

The journey of Bitcoin ETFs has been marked by multiple rejections and regulatory apprehensions. Yet, despite the reluctance of the SEC to approve a spot Bitcoin ETF, the industry remains undeterred. From the initial denial of the Winklevoss Bitcoin Trust application in 2016, firms have persistently sought approval, though to no avail due to concerns about investor protections and potential price manipulation.

However, with the recent news of BlackRock - the world's largest asset manager - applying for a Bitcoin spot ETF, could we be on the cusp of a change? The implication is profound - a successful bid could transform the crypto landscape and offer a renewed sense of optimism in the push for broader acceptance of Bitcoin ETFs.

BlackRock Steps into the Bitcoin ETF Fray

BlackRock, the world's largest asset manager, took initial steps towards launching a spot Bitcoin ETF, according to a recent filing with the U.S. Securities and Exchange Commission. This proposed iShares Bitcoin Trust would provide investors with a streamlined avenue for crypto exposure, creating an investment opportunity akin to direct Bitcoin ownership.

However, hurdles are anticipated, given the SEC's history of resistance towards spot Bitcoin ETFs, and the ongoing legal battle with Grayscale over a similar proposition. A decision is due later this year, and success could catalyze a surge of similar products in the market. The proposed BlackRock ETF has chosen Coinbase as its Bitcoin custodian, reflecting their existing strategic partnership. This ambitious move by BlackRock could potentially revitalize a sector that has had a tumultuous start.

BlackRock's ETF Approval Record Raises Hope

It's not just the stature of BlackRock making this significant, but their impeccable record with the U.S. Securities and Exchange Commission (SEC). Out of the 576 ETF applications BlackRock has filed, 575 have been approved. The only rejection came in 2014 for a specific kind of actively managed ETF. Given this record, the asset management giant's Bitcoin ETF application stands a high chance of approval. If greenlit, it would mark the birth of the first Bitcoin Spot ETF and it could potentially be the catalyst needed for the next bullrun.

Decoding BlackRock's Timing: A Strategic Move or Market Play?

The timing of BlackRock's ETF application is stirring up debate. Amidst ongoing SEC lawsuits against major crypto players, the stage seems set for traditional powerhouses to swoop in. Could this be a part of the alleged "Operation Chokehold 2.0" strategy, designed to edge out crypto native companies and wrest control over the sector?

With Coinbase slated as the proposed custodian, despite being under the SEC’s scanner, the plot thickens. But how will this move impact the market? Initially, the news could provide a bullish sentiment, potentially followed by a 'sell the news' bearish phase. Eventually, though, long-term price enhancement seems plausible.

Yet, concerns linger. Known for their aggressive strategies, BlackRock could leverage this instrument to manipulate price and knock out competitors. Is this a well-intentioned bid to regulate the wild west of crypto or a veiled attempt at market control? Only time will tell.

The crypto world is teetering on the edge of a significant shift. While the potential approval of a Bitcoin spot ETF could spell long-term growth, the implications for market control and competition are worth monitoring. In this evolving landscape, staying informed is our best bet against uncertainty. Let's watch this space closely and navigate these exciting times together.

What is a Bitcoin Halving?

In the heart of Bitcoin's unique design lies a mechanism known as 'Bitcoin halving,' an event set to occur approximately every four years. This process slashes the number of new Bitcoins created and rewarded to miners with each block mined by half, a measure crafted to control Bitcoin's supply and bolster its scarcity.

The initiation of this practice took place in 2012 when the reward for mining a block plummeted from 50 Bitcoins to 25. Four years later, the second halving further reduced the reward to 12.5 Bitcoins. Fast forward to May 2020, the most recent halving event brought down the mining reward to 6.25 Bitcoins. This halving will continue until the network generates the maximum supply of 21 million Bitcoins.

Why does the Bitcoin halving hold such weight, particularly for traders? The halving essentially constricts the supply of new coins, creating a scenario where prices could soar should the demand retain its strength. Indeed, history has shown us that Bitcoin's price tends to appreciate rapidly in the months surrounding halving events. However, it's crucial to note that the context of each halving can greatly differ, causing Bitcoin demand and, subsequently, its value, to fluctuate significantly. Thus, while the halving holds great potential to drive price appreciation, it's always tethered to the unpredictable nature of market dynamics.

The Next Halving in 2024: When and What Can We Expect?

Looking ahead, the next Bitcoin halving event is projected to happen in April 2024, when the block count reaches 740,000. This milestone will reduce the block reward from the current 6.25 to 3.125 bitcoins. The exact date is yet to be determined due to the variability in block generation times, but the network typically produces one block every ten minutes.

Casting an eye back to the last halving event on May 11, 2020, the block rewards dropped by half, from 12.5 to 6.25 bitcoins. This tightened supply initiated a bullish trend, driving Bitcoin's price from $6877.62 a month prior to $8821 at the event, and despite volatility, to $49504 a year later.

This pattern echoes the aftermaths of the 2012 and 2016 halvings. After a significant value drop around a year later, the price remained markedly higher pre-halving, hinting at potential outcomes post the 2024 halving event.

The above visual representation captures the significant swings in Bitcoin's price trajectories across each halving event.

Bitcoin's Four-Year Cycle

The pattern of Bitcoin's value fluctuations, notably referred to as its 'Four-Year Cycle,' is predominantly linked to its unique mining procedure. The intricacy of these algorithms for validating transactions and generating new blockchain blocks intertwines with Bitcoin's value.

Every 210,000 blocks (approximating to a four-year span), the mining reward halves, naturally reducing the Bitcoin generation rate. This built-in scarcity mechanism historically triggers a price surge, marking an increase in demand against a lower supply.

This intriguing cycle unfolds over distinct phases. The 'Accumulation Phase' kickstarts the cycle following the dip from the preceding cycle's peak. Savvy investors seize this opportunity to acquire Bitcoin, eyeing the next value surge.

Next, the 'Mark-Up Phase' sees the price skyrocket, typically midway in the cycle, fueled by heightened investor demand.

The peak triggers the 'Distribution Phase,' as initial investors cash out their profits, instigating a price drop.

Lastly, the 'Markdown Phase' manifests in a sharp price decline, an adjustment period that can span months, or even years, as the market rebalances supply and demand.

This predictable yet fascinating cycle provides insights into Bitcoin's future trajectory.

Having understood the four-year cycle of Bitcoin, it's vital to explore another key aspect that has been continually making headlines in the crypto space – Bitcoin Exchange-Traded Funds (ETFs). The elusive approval of a Bitcoin ETF has been a hot topic for years, with numerous applications submitted but none seeing ultimate success so far. Let's pivot to this intriguing narrative, exploring the continuous efforts, setbacks, and what an approval could mean for Bitcoin within this cyclic context.

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