Bitcoin has risen 100% this year. In addition to the speculation of spot ETFs, there are also these factors

• Bitcoin rose above $34,000 this week and is up 106% so far this year after a tough 2022 decline.

• Presumably, the latest rally is due to excitement surrounding the potential approval of a spot ETF, but are there other factors at play?

• Limited supply, underinvestment by market participants, and Bitcoin’s renewed vitality as a safe haven from troubled traditional markets and geopolitical turmoil are all catalysts worth considering.

(Bitcoin price in 2023, source: CoinDesk)

Bitcoin (BTC) has had a strong rally this past week on two spot ETF stories that turned out to be completely false. Even after the fake news came to light, the price barely retreated, suggesting that perhaps it wasn’t the ETF expectations that were driving the surge.

To recap, ten days ago, Bitcoin, which had been hovering in a narrow range of around $27,000 to $28,000 for weeks, rose to over $30,000 after a media outlet tweeted that BlackRock’s spot ETF application had been approved by the U.S. Securities and Exchange Commission (SEC). Within minutes, the tweet was revealed to be a mistake, and Bitcoin quickly gave back some of its gains, but not all of them.

Earlier this week, some observers noticed that the ticker symbol for the BlackRock Spot Bitcoin ETF (IBTC) appeared on the website of the exchange clearing house DTCC. Market participants took the news as a signal that the U.S. Securities and Exchange Commission was about to approve the fund. The bullish signal caught short sellers and traders off guard, causing prices to surge to $35,000 late Monday.

However, by Tuesday evening, it was revealed that the IBTC ticker had been on the DTCC website for several months, with little to no implications for whether a spot bitcoin ETF would be launched.

However, the price of Bitcoin remains very close to Monday’s highs, currently at $34,400, having risen nearly 30% in the past 10 days and more than 100% in 2023.

If not ETFs, then what?

Some analysts argue that Bitcoin has gained popularity as a safe-haven asset, pointing to massive government spending and associated rising debt levels, instability in stock and bond markets and increasingly limited supply of cryptocurrencies.

“Bitcoin is now being touted as a ‘go to quality asset’ by the world’s largest asset managers at a time of debasement of fiat currencies and rising global tensions and wars,” said Charles Edwards, founder of Capriole Investments. “You couldn’t ask for more.”

“In 2022, many people were deceived into believing that digital assets were correlated with stocks and bonds, and many are scratching their heads about the ‘new’ old normal,” noted Arca Chief Investment Officer Jeff Dorman. “The debt spiral has led to a loss of confidence in banks and governments and a repricing of risk-free rates at record supply, which is bad for bond and stock valuation models but good for other forms of wealth and money creation,” he added.

Hedge fund giant Paul Tudor Jones praised gold and Bitcoin as attractive investment options, while geopolitical risks and "unsustainable" U.S. debt levels make it difficult to own stocks.

K33 Research and CoinShares respectively believe that since the classic 60% stocks, 40% bonds portfolio is going through one of its worst periods, uncorrelated assets like BTC could be a strong contender for diversification.

Banking woes in the US and China

In March, bitcoin jumped from $20,000 to around $28,000 during the U.S. regional banking crisis, which saw banks such as Silicon Valley Bank and Signature Bank collapse.

The recent crisis in China’s shadow banking system may also have helped Bitcoin in a similar way, Switzerland-based investment management company 21Shares said in a report last week.

The report explained that the People's Bank of China (PBOC) earlier this month injected the equivalent of more than $100 billion, the most in three years, to maintain liquidity in the banking system following the bankruptcies of Chinese real estate giants Evergrande and Sunac.

The report noted that when the People’s Bank of China intervened in January 2020 by reducing the reserve requirement ratio for financial institutions, equivalent to adding $115 billion in capital to the Chinese economy, Bitcoin rose 13% and active Bitcoin addresses increased 48%.

As long-term bond yields surged toward nearly 5%, some banks were sitting on large unrealized bond losses, raising concerns about the health of the U.S. banking system.

Indeed, Bank of America Corp. (BAC) last week reported a $131 billion loss in its held-to-maturity (HTM) portfolio in the third quarter. Stock market investors have taken notice, causing BAC's stock price to fall nearly 8% over the past five trading days and 24% year to date.

“Banking crises often prompt people to turn to Bitcoin as a quality alternative, thus expanding the cryptocurrency’s use as a hedge against shifting macroeconomic influences and the changing geopolitical landscape,” 21Shares analysts wrote.

Spot BTC ETF could still be the main catalyst

Alex Thorn, head of firmwide research at Galaxy Digital, said that despite the long odds for a spot BTC ETF, many market participants remain fascinated by the potential rise in BTC prices.

“A lot of people are not prepared,” Thorn said in an interview at a cryptocurrency conference in Washington, D.C., on Tuesday.

Thorn noted earlier this week that this week’s surge found options traders offside, leading to an explosion in price action.

He added that historically illiquid markets and record amounts of Bitcoin held by long-term investors set the stage for a supply shock.

The amount of Bitcoin held by long-term investors has hit an all-time high (Galaxy Digital, using Glassnode data)

Glassnode data shows that nearly 70% of Bitcoin's supply has not changed in a year, and 30% of circulating tokens have not changed hands in five years.

“We all underestimated how underinvested investors were in digital assets and how little new money was needed to cause big price moves,” said Arca’s Dorman.