It’s hard not to be bullish on Bitcoin (BTC 0.14%) in 2024. Last year, Bitcoin was up more than 150% and soundly outperformed every major market benchmark. At a recent price of $45,000, Bitcoin was trading at its highest level since April 2022. On top of all that, anticipation is growing over the upcoming Bitcoin halving event and what that might mean for the future price of Bitcoin.
But that doesn’t mean an investment in Bitcoin is without risk. In fact, there might be two major risks investors are overlooking.
The spot Bitcoin ETF
The first risk involves the imminent launch of the first spot Bitcoin ETF for the U.S. market. Over the final months of 2023, this looked like a slam-dunk certainty, with many expecting the SEC to approve the first spot Bitcoin ETF in early January. After all, more than a dozen Wall Street firms have submitted ETF applications, and they have been carefully updating and amending these applications as needed.
But the latest word in the crypto markets is that the SEC might delay any approval for a spot Bitcoin ETF until there is a more comprehensive regulatory framework in place for crypto within the United States. Obviously, this would be devastating news for Bitcoin investors, given that much of the recent run-up in price has been driven by anticipation around approval of the spot Bitcoin ETF.
Moreover, even if the SEC approves a spot Bitcoin ETF, there’s still the matter of what will happen to the price of Bitcoin. If you believe in efficient markets, then much of the expected price bump that Bitcoin is expected to get after official approval of the first spot Bitcoin ETF may already be priced in. That might be a shock to some investors, who are likely assuming that official SEC approval sometime in January is automatically going to send the price of Bitcoin soaring.
According to Cathie Wood of Ark Invest, the price of Bitcoin might actually decline in the short term. That’s due to a well-known market phenomenon called “buy the rumor, sell the news.” In short, investors buy ahead of anticipated news of a major event. Then, once the event actually occurs, they sell, in order to take profits. So if you’re expecting a major bounce in the price of Bitcoin in early 2024, you might want to readjust your expectations.
The arrival of institutional investors
The other risk involves the sudden influx of many new institutional investors into crypto at one time. Right now, everyone is focused on the potential tsunami of new money flooding into Bitcoin, which is almost certain to prop up the price of Bitcoin. The basic thinking here is that these institutional investors will be looking to allocate 1% or more of their portfolios to Bitcoin. Given that the largest of these investors manage trillions of dollars in assets, this could result in billions of dollars eventually flowing into Bitcoin.
But what’s actually going to happen to Bitcoin over the long haul? Remember — Bitcoin is not just a financial asset, it is also a technological innovation that relies on a vibrant blockchain ecosystem. Crypto executive Arthur Hayes, for example, thinks that the entry of large institutional investors into crypto will “completely destroy Bitcoin.” As he points out, the biggest institutional investors are in the “asset accumulation game,” and their goal will be to acquire as much Bitcoin as possible.
As Wall Street goes into asset accumulation mode, it could transform Bitcoin from a dynamic, thriving blockchain with multiple use cases into a lifeless blockchain where nothing interesting ever happens. A large percentage of the world’s Bitcoin will essentially be locked up in a vault on Wall Street, doing nothing. In a worst-case scenario, Bitcoin miners will simply stop mining Bitcoin because it is no longer profitable, and Bitcoin as we know it, says Hayes, will simply “vanish.” The race will then be on to find the next great cryptocurrency after Bitcoin.
Yes, Bitcoin, but which way to invest in Bitcoin?
To make sense of all this, I’ve been keeping my eye on what the “smart money” is doing ahead of the arrival of the new Bitcoin ETFs. Cathie Wood of Ark Invest, for example, appears to be searching for the best investment vehicle for Bitcoin. At year-end, Ark Invest sold shares in Coinbase Global (COIN -1.04%), which is viewed as a Bitcoin proxy stock, and also sold shares in Grayscale Bitcoin Trust (GBTC -0.23%), which is trying to convert into a spot Bitcoin ETF. Ark Invest then bought shares of the ProShares Bitcoin Strategy ETF (BITO -0.51%), which tracks the performance of Bitcoin using futures contracts (and not spot Bitcoin).
Thus, the decision of whether or not to invest in Bitcoin is slightly more nuanced than you might assume. It’s up to you as an investor to decide (a) if Bitcoin is right for you and, if so, (b) what the best way to invest in it will be going forward. Heading into 2024, the primary choice is shaping up to be one between spot Bitcoin (Bitcoin bought and sold on cryptocurrency exchanges) and a spot Bitcoin ETF.