Bitcoin Market Tailwinds

Bitcoin has been the flag bearer for the crypto industry for virtually the entirety of 2023, despite the ongoing bear market. This is largely because the failures of the crypto industry in 2022 were due to (1) centralized entities collapsing, which BTC’s decentralized, permissionless nature avoids, and (2) monetary experiments within the non-BTC crypto space failing (e.g., the Terra/LUNA ecosystem), which strayed from the core purpose of BTC to be an immutable, non-programmable, store-of-value asset. Despite a wave of crypto bankruptcies and ensuing regulatory backlash, BTC has rallied 85% YTD and still maintains a market cap near $600bn. Bitcoin has proven to be the most antifragile and most Lindy asset of the crypto ecosystem. Moreover, the fundamentals for Bitcoin and its ecosystem remain resilient, with several potential tailwinds emerging and planting the seeds for a potential resurgence. In this piece, we will dive into some potential catalysts for Bitcoin to emerge from the bear market as a more robust, institutional, and widely accepted store-of-value asset. We examine the following tailwinds: (1) regulatory uncertainty is not yet over – BTC benefits while the broader crypto space is left in flux; (2) a new round of efforts has begun in support of spot Bitcoin ETFs, driven by institutions rather than crypto-native firms; (3) institutional traditional financial players are revisiting the Bitcoin thesis, with potential favorable biases, and (4) the halving is merely ~9 months away, an imminent supply reduction for BTC.

BTC: Commodity or Security?

• Unsurprisingly, there has been regulatory backlash over the events in the crypto space in 2022. From the collapse of algorithmic stable coins (LUNA)to the failure of several centralized and unregulated entities dealing with crypto customers, the response has been (1) a flurry of enforcement actions and (2) a call for a broader regulatory framework.
• However, several of the enforcement actions have named crypto assets as unregistered securities, which creates uncertainty for those assets and for the platforms that list them. A growing number of alt coins (67 so far) have been named securities. Even the status of Ethereum is uncertain. However, the consensus view has emerged that BTC is a commodity.
• As a result, institutions may be more comfortable with BTC products than with alt coins – providing a potential regulatory tailwind for Bitcoin.

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BTC’s New ETF Saga

• The first wave of spot BTC ETF filings failed. With Grayscale’s GBTC as the tainted industry bellwether, Grayscale and others have been repeatedly rejected. The ETFs that have been approved have been those that track BTC futures rather than spot.
• However, the landscape markedly changed in June when institutional juggernaut Blackrock filed for a new spot BTC ETF, followed by fellow giant Fidelity. Blackrock has only faced one ETF registration rejection in its history, and the consensus view is that a spot BTC ETF is more probable with this new wave of institutional support.
• Initial dialogue on these ETFs seemed negative, with the SEC pointing out several shortcomings, but Blackrock and Fidelity resubmitted their filings with clarifications (naming specific custodians and BTC market surveillance mechanisms). An institutional BTC ETF would be very positive for Bitcoin.

BTC Institutional Legitimacy

• Building on the institutional spot BTC ETF filings, Blackrock’s CEO,Larry Fink, offered a revamped thesis on what Bitcoin represents.
• Fink mentioned two key characteristics: (1) BTC is the digital version of gold (and gold is viewed as the bellwether store-of-value asset), and (2) BTC is an international asset – tradable and accessible beyond borders.
• For a decade since Bitcoin’s inception, the asset was consistently referred to by institutions as an “index for money laundering” or other negative terms –this bias has held BTC back from mainstream adoption, which will require legitimate institutional backing.
• Blackrock’s change in tune – both on the BTC thesis and through its BTC ETF filing – marks a paradigm shift and a potential institutional tailwind for Bitcoin.

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Fundamental Driver: Halving

• Finally, taking a slight detour from the regulatory and institutional drivers around the Bitcoin ecosystem, we come back to one of the most core fundamental drivers for BTC: the Halving cycle.
• Indeed, crypto has historically traded in 4 year boom-bust cycles, and the bull portions of these cycles have historically lined up with the Bitcoin halvings. While past performance never guarantees future results, the next BTC halving is coming up in ~9 months and coincides with (1) an election year in the US and (2) the potential end of a rate hiking cycle. This halving, coupled with a potential BTC ETF, could potentially plant the seeds for another Bitcoin bull cycle.
• After the next halving, the BTC block reward will drop from 6.25 BTC to 3.125 BTC, effectively reducing potential sell pressure from BTC mining rewards by half. This supply shock is a fundamental tailwind to