Bankless: ETFs, Halving, Rate Cuts, Where is Bitcoin Heading Next?

Original Title: Where Bitcoin Goes Next

Original Author: Jack Inabinet

Original Compilation: Luccy, BlockBeats

Editor's Note: Bitcoin remains a major narrative for the new year, with market sentiment rising as the deadline for the spot Bitcoin ETF decision approaches. A report from Matrixport has led to over $450 million in liquidations across the network. Bankless analyst Jack Inabinet analyzes the differing adoption of spot Bitcoin ETFs in Canada and Europe, as well as the global market's investment attitude towards Bitcoin. Jack Inabinet emphasizes that, against the backdrop of global economic uncertainty, halving and interest rate cuts may not necessarily be positive signals. BlockBeats compiles the original text as follows:

As 2024 begins, the fundamental narrative for Bitcoin looks as strong as ever, with crypto analysts nearly unanimous in their bullish outlook for Bitcoin!

With the deadline for approval of the spot Bitcoin ETF approaching next Wednesday, industry insiders are optimistic about the introduction of these instruments, believing they will pave the way for billions of dollars to flow into Bitcoin over the next few years.

Additionally, market participants are filled with optimism regarding the upcoming Bitcoin halving, an event in April that will reduce the inflation of Bitcoin block subsidies by 50%, and historically this usually leads to a decrease in miner sales, driving Bitcoin prices to soar.

While just two obvious Bitcoin catalysts are enough to create conditions for a price increase, the anticipated interest rate cuts next year have traders eagerly looking forward to a more favorable macro environment that could push Bitcoin to new all-time highs.

Nevertheless, the recent bullish sentiment towards Bitcoin is not lacking. However, there are some important considerations to keep in mind before eagerly following Bitcoin to enjoy the potential massive gains that may come in 2024.

Demand Must Materialize

While Americans may still be new to spot crypto ETFs, these instruments have already existed in Canada and Europe, with varying degrees of adoption.

Since the end of September last year, Canada's Purpose spot Bitcoin ETF has increased its managed Bitcoin by 50%, reaching 35,000, which is a respectable growth. Meanwhile, the European issuer Jacobi has only managed to accumulate a meager $1.7 million in assets since its launch in November.

Global investors face the same investment narrative as Americans, and their insufficient demand for spot Bitcoin products may indicate that inflows from the U.S. may not be as ideal.

For the approval of Bitcoin ETFs to have an immediate positive impact, issuers must meet the new demand from external investors seeking exposure to Bitcoin; however, it remains unclear whether such demand exists.

In the long run, making it easier to invest in Bitcoin will be a bullish catalyst for the asset. However, if the ETF approval leads to disappointing immediate inflows, the bullish side still faces the risk of trading errors.

History Only Rhymes

Just because previous Bitcoin halving events have been bullish does not mean that future halving events will also be bullish.

Just as the slight reduction in Ethereum issuance after the merge failed to drive Ethereum prices in the following months (the ETH/BTC ratio has since dropped over 30%), a reduction in issuance from this Bitcoin halving does not guarantee a positive impact on Bitcoin prices.

While reducing block issuance to alleviate selling pressure will undoubtedly have a bullish effect on Bitcoin prices to some extent, the impact of this halving will be significantly weaker compared to previous halvings; do not be surprised if the expected price increase pattern after the Bitcoin halving does not materialize.

Rate Cuts Do Not Automatically Favor

Many confuse lower interest rates with easing economic conditions, but they are just one input in the macro story.

All else being equal, lowering interest rates does reduce the required rate of return, making risk assets (like cryptocurrencies) appear more attractive. However, it is crucial to remember that rate cuts have historically been a monetary response to economic deterioration.

Regardless of the asset class, the greatest risk for any investor is the market, and it remains unclear whether lower interest rates are sufficient to counter an economy showing signs of recession.

Cryptocurrencies do not exist during prolonged economic contractions, and peak interest rates indicate that the worst economic downturn has yet to come.