The Catalysts Are Building For Bitcoin (BTC-USD)

Introduction

In this article, I’m going to provide an update on the catalysts that are driving the tremendous upward momentum in the Bitcoin (BTC-USD) price. However, each of these comes with risks that could cause Bitcoin price to reverse its momentum going forward.

Catalysts

1. The increasing utility of Bitcoin
2. The upcoming Bitcoin halving
3. Spot Bitcoin ETFs
4. The synergies of the three catalysts above

I believe that these catalysts have contributed to the increasing price of Bitcoin. Furthermore, since Bitcoin’s price is dependent on supply and demand dynamics, it is possible to argue that the upcoming Bitcoin halving will reduce the upcoming Bitcoin supply, the spot ETFs and increased utility will increase the demand for Bitcoin, and hence the price of Bitcoin should go up.

1. The Increasing Utility of Bitcoin

Potential

Bitcoin is up 13.5% since I recommended it as a buy on June 27th. I recommended it on the basis of the digital assets utility for being a payment layer through the lightning network. In my article, “Can Bitcoin Lightning Solve The Remittance Industry?”, I discussed how Bitcoin has the potential to be used as a payment rail for international transactions. Block Inc’s (SQ) CEO, Jack Dorsey, has suggested Bitcoin as “the native currency of the internet” as well as a remittance tool where the end users don’t know that they are actually using the Bitcoin blockchain to make the transaction (Forbes).

Using Bitcoin as a back-end mechanism will serve to increase the demand for Bitcoin. Given that more financial institutions use Bitcoin as a payment rail, then these institutions will need to buy Bitcoin in order to process transactions. Block Inc.’s Cash App has integrated the Bitcoin lightning network onto Cash App and given Dorsey’s comments above, I believe there is a significant chance that the company is working on a Bitcoin remittance solution.

Another use-case that is evolving for Bitcoin is a so-called “sats economy”. The sats economy refers to using satoshis (the smallest denomination of bitcoin) to send small tips of appreciation to others on social media. Damus used this model after it launched earlier this year, however, Apple (AAPL) has forced Damus to shut this feature down during the summer (Reddit). The problem with this use case is that it bypasses Apple’s rules for in-app payments. This reflects the strength of the Bitcoin lightning network, but also the complete pushback it has received.

For these reasons, I believe this catalyst is the weakest but also the most overlooked. Although nothing very concrete has materialized yet within the utility use case, it is likely soon to come… and if it does the scale could be vast.

Risk

The payments industry comprises many large and powerful players, including Mastercard (MA), Visa (V), and PayPal (PYPL). How will they look upon Bitcoin as a future payment rail? Will these companies adopt the technology or build their own offering to compete against it? PayPal, for example, has a stablecoin called PAYUSD that developers are able to build new payment layers on top of. This is very similar to the Bitcoin ecosystem and directly the opposite approach that Block Inc. has taken. Instead of building on and integrating the Bitcoin network into Venmo and PayPal, the company has created its own. Actions like this could undermine the eventual increase in demand for Bitcoin.

2. The Upcoming Bitcoin Halving

Potential

If you didn’t already know, Bitcoin is set to halve in April 2024. This implies that the reward for mining one Bitcoin will be cut in half in April, effectively lowering the rate at which future supply enters the market.

Historically, Bitcoin halvings have led to price increases in Bitcoin both before and after the halving occurs. Notice this dynamic in the image below:

Every halving has been front-run by significant price increases. This is likely due to the supply and demand effect. As more people realize that the Bitcoin halving is coming the more Bitcoin is bought, which raises the price of the asset due to higher demand. After Bitcoin halvings have occurred, the price of the asset has gone up even more dramatically in general.

We are currently about five months away from the beginning of April and we’ve seen a very significant price increase over the past few months. Since its January lows Bitcoin has doubled and since the end of September the Bitcoin price has increased by around 35% with steep increases in the past few days.

Risk

Although Bitcoin halvings in the past have historically always correlated with increases in the Bitcoin price, there is no rule that this has to be the case. One risk with looking at the historical price action of Bitcoin is that the digital currency really doesn’t have a long history. Since its inception, Bitcoin has only halved three times. Why will this time be the same?

3. Spot Bitcoin ETFs

Potential

There are currently 12 spot Bitcoin ETFs pending application: “The applications are from Grayscale, 21Shares & Ark, BlackRock, Bitwise, VanEck, WisdomTree (“WT”), Invesco (“IVZ”), Galaxy, Fidelity, Valkyrie, Global X, Hashdex and Franklin” (Coindesk). These spot ETFs generally imply that investors will be able to take part in Bitcoin’s price development without buying Bitcoin directly. Hence, we can think of these brokerages/investment firms as distribution channels for Bitcoin. The more distribution channels Bitcoin has, the more consumers will be able to gain easy access to the digital asset. This will clearly increase the demand for Bitcoin.

In fact, Galaxy estimated in a research report that inflows into a Bitcoin “ETF” could amount to $14 billion in year one, $27 billion in year two, and $39 billion in year three. Given the huge asset management industry, it is likely that asset managers begin suggesting customers allocate a small portion of their wealth into this quickly growing “digital gold”.

If we build upon Galaxy’s logic quickly: 12 spot ETFs with $14 billion in inflows in year one would result in total inflows of $168 billion during the first year. Galaxy found that the amount of Bitcoin held under management on September 30th was $21.7 billion, or 4.3% of the current supply at the time. If Galaxy’s calculations are correct, the ETF adoption would imply an almost 8x increase in the amount of Bitcoin held under management with regard to monetary value. Personally, I believe that this could be a little bit of a stretch target, which the research report also admits: “if Bitcoin spot ETF approvals are delayed or denied, our analysis would be altered by timing and access restriction. Or if poor price performance, or any other factor, leads to lower-than-expected access or adoption to a bitcoin ETF, our estimates could prove too aggressive.”

Risk

Insofar, the SEC has not accepted any of the spot Bitcoin ETFs which means that much of the Bitcoin price increase could be built upon a false sense of hope. The SEC still hasn’t approved anything “citing risks such as market manipulation and fraud” (Kiplinger). On top of this, the greed index which was mentioned in a recent Seeking Alpha news article suggests that the greed of Bitcoin-buying has reached the highest point since November 2021 (Seeking Alpha).

4. The Synergies of the Three Catalysts Above

Based on the discussion of each of the three catalysts above, we can presume that if all of the catalysts fall in place around the same time, Bitcoin prices will receive strong momentum. This will likely not be the case for the utility catalyst for Bitcoin since I believe this is a long-term development that we may see as Bitcoin becomes more “built into” offerings at existing companies. However, the Bitcoin halving is certain. This catalyst is likely the strongest since it has historically always meant that Bitcoin prices will rise. If the halving event is coupled with the regulatory acceptance of spot ETFs, demand would increase (potentially by a lot as claimed by Galaxy) and the rate of supply will contract causing the price to increase.

Verdict

In all, I remain just as bullish on Bitcoin as a long-term investment as I did during the summer when I published my first article on the digital asset. As opposed to then, halving is nearly in sight, and the general reception of potential spot Bitcoin ETFs has been really positive. To me, these are signals that indicate that Bitcoin can continue rising, but the uncertainty of whether spot ETFs are accepted or not makes this catalyst relatively weak on its own. My belief, however, is that asset management firms are doing everything they can to influence the acceptance of these ETFs as it would give the institutions more money and a potentially broader customer base. For these reasons I rate Bitcoin a buy as a long-term investment with both short and long term catalysts on the horizon.