For months, Wall Street investors had been predicting the price would rise Bitcoin (BTC 1.37%) would skyrocket once the SEC finally approves the new spot price Bitcoin ETFs. But that didn't happen. Quite the opposite. The price of Bitcoin has now fallen to $40,000 and fears that it could fall even further are growing.
This is all probably a bit confusing, especially for the crypto newbie who expects to become a Bitcoin millionaire overnight. But it's actually part of a pattern we've seen time and time again with Bitcoin, and there's no need to panic now. Let's take a closer look.
Bitcoin and tactical asset allocation
There has been intense media coverage of the new spot price Bitcoin ETFs, as well as an extensive list of possible reasons why the price of Bitcoin fell following SEC approval. One possible explanation is related to the concept of tactical asset allocation, which simply refers to the process of reallocating funds across different asset classes to take advantage of short-term market situations.
Image source: Getty Images.
In layman's terms, this simply means that money is being moved back and forth between different Bitcoin investment products as people look for the best way to gain exposure to Bitcoin. Unfortunately, this process creates downward pressure on the price of Bitcoin.
Keep in mind that people have different options if they want to buy Bitcoin now. You can invest in Bitcoin proxy stocks (e.g. Bitcoin mining companies). You can invest in Bitcoin futures contracts. You can buy futures-based Bitcoin ETFs. You can buy Bitcoin directly on the spot market through a cryptocurrency exchange. And they can invest in the new spot price Bitcoin ETFs.
For Bitcoin's tactical asset allocation thesis to make sense, one would expect certain things. One would expect people to sell Bitcoin proxy stocks as they look for more direct exposure via Bitcoin ETFs at the spot price. That happened. One would expect people to switch from the more expensive futures Bitcoin ETFs to the cheaper spot price Bitcoin ETFs. That happened. And one would expect Bitcoin trading volume on crypto exchanges to drop as people buy ETFs instead. This also appears to be happening.
In my view, this explanation makes a lot of sense if one assumes that most investors are rational when looking for the best way to invest in a particular asset. Furthermore, I find this explanation strangely comforting because it means that nothing has changed in the grand macro thesis of Bitcoin adoption. This means that nothing significant has changed in Bitcoin's long-term growth prospects. In fact, the only downside is that there may be less “new” money flowing into Bitcoin than we expected. Instead, it is simply “recycled” money from other Bitcoin products.
Historical Evidence of Bitcoin
Still not convinced? Now let's look at the historical evidence of Bitcoin and similar types of launches.
One of the best graphics I've seen in the last two weeks appeared on CNBC. As Markus Thielen of 10x Research pointed out, the same pattern has occurred with every major launch of Bitcoin-related financial products. A lot of early hype leads to a rise in the price of Bitcoin, followed by a quick downward correction based on the actual news.
This happened with the first Bitcoin futures contracts launched in December 2017. It happened with the initial public offering (IPO) of the crypto exchange in April 2021 Coinbase Global (COIN 3.46%), which made Bitcoin trading accessible to the average investor. This happened with the launch of the Bitcoin futures ETFs in October 2021. And now it is happening with the launch of the new spot price Bitcoin ETFs in January 2024. If you take a trading chart of Bitcoin and highlight this data, the trend is recognizably unmistakable . Quotes are followed by peaks, with slumps as a result. And long-term price gains continue after a pause.
While one could argue that correlation doesn't imply causation, there seems to be a strong pattern here, right? It suggests that as soon as there is a new way of investing in Bitcoin, people start to shift their Bitcoin funds, leading to a short-term price drop.
Buy the decline in Bitcoin
Long story short: you should buy the dip. In my opinion, Bitcoin under $40,000 is an easy investment opportunity. Based on my analysis, there is simply no way that a continued surge in new retail and institutional money into Bitcoin will not help support the price. And when many investors choose to allocate just 1% of their portfolio to Bitcoin, that provides long-term price support – and that's easier than ever thanks to new spot price ETFs.
That's why I'm still strongly bullish on Bitcoin. The process of democratizing cryptocurrencies for the average investor continues, and spot price Bitcoin ETFs are a welcome addition. Yes, the last two weeks have been chaotic, but I am more convinced than ever that investors need to hold Bitcoin for the long term and learn to manage its volatility.
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