Plus 25 percent in two weeks: These are the reasons for the sharp rise in Bitcoin

A court decision with major consequences?

One of the main reasons for Bitcoin’s rise in recent weeks is speculation that the US Securities and Exchange Commission (SEC) may soon approve the first Bitcoin exchange-traded ETF. Many major financial companies, including Blackrock and Fidelity, have filed Bitcoin ETF applications with the SEC. So far, the U.S. Securities and Exchange Commission has rejected all applications for Bitcoin ETFs. He cited concerns about fraud and manipulation in the underlying market.

But perhaps a decisive turning point occurred two months ago. A US court (Federal Court of Appeals for the District of Columbia) issued a decision requiring the US Securities and Exchange Commission (SEC) to review one of its decisions. This is about Grayscale, the financial company specializing in cryptocurrencies. This had filed a legal request to convert the Grayscale Bitcoin Trust (GBTC) into a spot ETF.

GBTC is currently legally structured as a foundation. Therefore, its shares are traded only over-the-counter and its price can differ greatly from the price of Bitcoin. Switching to a Bitcoin spot ETF would eliminate these drawbacks. However, the SEC rejected Grayscale’s application due to concerns about manipulation of the Bitcoin market. But the U.S. Court of Appeals argued that the spot and futures markets were so closely interconnected that a distinction based on risks of fraud and manipulation could not be justified.

Important to know: The SEC has approved several futures Bitcoin ETFs in the last two years. Bitcoin futures ETF is based on futures contracts that represent the future price of Bitcoin. The Bitcoin spot ETF, on the other hand, is based on actual Bitcoins that are bought and sold directly.

ETF speculation

If the court’s argument that the distinction between futures ETFs and spot ETFs is not justified is not valid, the SEC will have only two options: It will withdraw its approval of Bitcoin futures ETFs, which seems extremely unlikely. Or it allows spot ETFs in Bitcoin.

Bitcoin trading would suddenly become as easy as buying or selling a traditional stock ETF. Therefore, investors will not have to deal with the complexities and risks that previously came with trading and owning cryptocurrencies.

Given these developments, many cryptocurrency fans assume that approval of the Bitcoin ETF is imminent. This is likely to significantly increase the adoption of cryptocurrency not only among private but also institutional investors. As a result, at least according to many crypto enthusiasts, there will be a sharp increase in demand and liquidity for Bitcoin, which will have a positive impact on the price.

The enthusiasm among Bitcoin investors was particularly boosted by a report from analysts at JP Morgan that the US bank published on October 18. “The timing of approval of spot Bitcoin ETFs remains uncertain, but is expected to occur within the next few months and most likely before January 10, 2024,” wrote JP Morgan analysts led by Nikolaos Panigirtzoglou.

Crypto fans aren’t paying much attention to what analysts at JP Morgan are saying, as extreme enthusiasm prevails in the crypto community once again. Banking analysts believe the approval of the Bitcoin ETF is unlikely to be a turning point for crypto markets. This is because spot Bitcoin ETFs have been available in Canada and Europe for some time but have not attracted investor interest.

A false report with consequences

The crypto market would not be in this situation if a significant price increase was not accompanied by suspicious events. On the same day as JP Morgan’s analysis, news went viral that the SEC had approved a Bitcoin ETF from I-Shares. Even Cointelegraph, a portal specializing in crypto news, spread the news. I-Shares is the ETF division of Blackrock, the world’s largest asset manager.

No wonder, then, that the news created tremendous enthusiasm in the market and the price of Bitcoin skyrocketed. This led to a wave of forced liquidations of short positions betting against the Bitcoin price because these positions were suddenly backed by insufficient capital.

However, this hoax was quickly debunked when BlackRock and the SEC denied it. Bitcoin price then made a U-turn and corrected more than 5 percent. Due to this significant price drop, following the aforementioned short positions, a large number of long positions that were betting on the Bitcoin price to rise further were also forcibly liquidated.

However, these events could not stop the enthusiasm of crypto fans on the contrary. Even the false report is seen by some as an indication that Bitcoin ETFs will soon be approved and therefore prices will continue to rise, supported by the so-called halving.

Halving as a boom accelerator

Halving is an event in Bitcoin mining that occurs every four years, the next time it may occur in March 2024. The reward miners receive for mining a new block has been halved. The halving causes the rate at which new Bitcoins are created to gradually slow down, causing the supply of Bitcoins to become more scarce.

Generally, the Bitcoin protocol sets a limit of 21 million Bitcoins. This means there will never be more than 21 million Bitcoins. This limit was set by Satoshi Nakamoto, the inventor of Bitcoin, to make Bitcoin a scarce and deflationary resource.

The opinion of many Bitcoin optimists is that the halving will lead to a decrease in the supply of new Bitcoin, just at a time when demand has increased greatly due to the approval of Bitcoin ETFs. The price could then explode upwards and surpass the old highs of $69,000 from two years ago.

It’s not clear whether this will happen. But just how big crypto enthusiasm has become again can be seen in Bitcoin futures. These have skyrocketed to such heights that virtually risk-free annual returns of 7 to 15 percent can be achieved through arbitrage transactions. Crypto fans apparently assume Bitcoin’s rise will continue. They may be right, as the price of cryptocurrencies is strongly determined by momentum. At least for the near future.