Bitcoin Is Up 100% This Year. It's Not Just Because of Spot BTC ETF Hype

• Bitcoin rallied past $34,000 this week, and is up 106% so far this year after 2022's grueling grind lower.
• The latest surge supposedly happened on excitement around a potential spot ETF approval, but are other factors at work?
• Constrained supply, underinvested market participants and bitcoin's rejuvenated shine as a safe haven from troubled traditional markets and geopolitical turmoil are catalysts worth considering.

Bitcoin [BTC] managed a monster rally over the past week on two spot ETF stories that turned out to be complete fugazis. That the price has barely pulled back even after the fake news was outed suggests maybe it’s not ETF anticipation driving the surge higher.

To review, bitcoin – plodding along in a very tight range of roughly $27,000-$28,000 for weeks on end – was jolted above $30,000 ten days ago after a media outlet tweeted that BlackRock’s spot ETF application had won U.S. Securities and Exchange Commission (SEC) approval. Within minutes, the tweet had been revealed as a mistake and bitcoin quickly gave back some, but not all of its gains.

Then early this week, some observers noticed the ticker for BlackRock’s spot bitcoin ETF – IBTC – showed up on trading clearinghouse DTCC’s website. Market participants read the news as signaling imminent SEC approval of the fund. The bullish signal caught shorts and dealers off guard, leading to a price spike to $35,000 Monday evening.

By Tuesday evening though, it was revealed that the IBTC ticker had been on the DTCC site for months and meant literally nothing with respect to whether a spot bitcoin ETF might be coming or not.

Yet the price of bitcoin remains very close to Monday’s high and at the current $34,400 is ahead nearly 30% over the past 10 days and more than 100% for 2023.

If not an ETF, then what?

"​​We now have the biggest asset managers in the world trumpeting bitcoin as a 'flight to quality' amidst devaluing fiat currencies and mounting global tensions and war. You couldn’t ask for more."

Some analysts argue that bitcoin is in demand as a safe-haven asset, noting prolific government spending and associated rising debt levels, shaky stock and bond markets, and the crypto’s increasingly constrained supply.

"​​We now have the biggest asset managers in the world trumpeting bitcoin as a 'flight to quality' amidst devaluing fiat currencies and mounting global tensions and war," said Charles Edwards, founder of Capriole Investments. "You couldn’t ask for more."

"After 2022 tricked so many into thinking that digital assets are correlated to stocks and bonds, many are left scratching their heads at the 'new' old normal," Jeff Dorman, chief investment officer at Arca pointed out. "A debt spiral leads to a loss of confidence in banks and governments and a repricing of risk-free rates amidst record supply, which is bad for bonds and equity valuation models, but good for alternative forms of wealth and money creation," he added.

Hedge fund giant Paul Tudor Jones touted gold and BTC as attractive investment options while geopolitical risk and "untenable" U.S. debt levels make it difficult to own stocks.

As the classic 60% stocks, 40% bonds portfolio is enduring one of its worst periods, an uncorrelated asset like BTC could be a potent contender to diversify, K33 Research and CoinShares argued separately.

Banking woes in U.S. and China

In March, bitcoin jumped from $20,000 to around $28,000 during the regional banking crisis in the U.S., which saw the downfall of Silicon Valley Bank and Signature Bank, among others.

The recent crisis in the Chinese shadow banking system may also have helped bitcoin in a similar manner, Switzerland-based investment manager 21Shares noted in a report last week.

The report explained that following the bankruptcy of Chinese real estate giants Evergrande and Sunac, the People’s Bank of China (PBOC) earlier this month injected the equivalent of over $100 billion, the most in three years, in lending facilities to shore up liquidity in the banking system.

When the PBOC intervened in January 2020 by lowering the deposit reserve ratio for financial institutions, equivalent to a $115 billion capital boost for the Chinese economy, BTC gained 13% and active Bitcoin addresses rose by 48%, the report pointed out.

As long-term bond yields have surged to near 5%, some banks are sitting on massive amounts of unrealized losses on bonds fueling concerns about the health of the U.S. banking system.

Indeed, Bank of America (BAC) last week reported Q3 losses of $131 billion in its held-to-maturity (HTM) portfolio. Stock market investors have taken notice, driving BAC’s share price down nearly 8% over the past five sessions and 24% year-to-date.

"Banking crises have oftentimes prompted people to resort to bitcoin as a flight to quality, amplifying crypto’s use case as a hedge in evolving macroeconomic ramifications and an evolving geopolitical landscape," 21Shares analysts wrote.

Spot BTC ETF still could be a major catalyst

Despite the high odds for a spot BTC ETF, many market participants have slept on a potential upside move in BTC's price, according to Alex Thorn, head of firmwide research at Galaxy Digital.

"A lot of people were not positioned well for a rally," Thorn said in a Tuesday interview with CoinDesk TV at the State of Crypto conference in Washington, D.C.

This week's surge found options dealers off-side, contributing to the explosiveness of the price action, Thorn noted earlier this week.

Historically illiquid markets and all-time high amounts of bitcoin held by long-term investors laid ground for a supply shock, he added.

Almost 70% of bitcoin's supply hasn't moved in a year, and 30% of outstanding tokens haven't change hands in five years, Glassnode data shows.

"We all underestimated just how underinvested investors are in digital assets, and how little new money is needed to cause significant swings in price," said Arca’s Dorman.