Bitcoin’s unlikely resurgence: bulls bet on Wall Street adoption

Bitcoin is booming again, just weeks after the downfall of two of the industry’s biggest names. Bulls are hoping the prosecutions draw a line under the sector’s troubled past and will allow it to tap billions of dollars of cash from Wall Street.

The price of the most actively traded cryptocurrency has soared about 160 per cent this year to a 20-month high of $44,000, leading the charge among digital tokens as the gloomy sentiment that has hung over the market fades and traders pile back in.

It comes only weeks after the US successfully secured criminal prosecutions against Changpeng Zhao and Sam Bankman-Fried, the former chiefs of the Binance and FTX exchanges respectively and two of the biggest names associated with the bubble market of 2020-21.

Speculators are now betting that the toughest regulatory punishments have passed and bitcoin will be embraced by large global fund managers and investment banks.

“You’re looking at the two biggest guys in crypto potentially both going to jail and yet crypto goes on . . the old guard is being replaced by fresh money,” said Ed Hindi, chief investment officer at investment management firm Tyr Capital.

“Everything has been thrown at bitcoin and it’s held up, whether you like it or not, it’s going to command a place in portfolios.”

The surge in bitcoin, along with other cryptocurrencies, comes as investors place bets on growth stocks and riskier assets in anticipation that central banks will begin cutting interest rates next year.

CK Zheng, co-founder and chief investment officer at crypto hedge fund ZX Squared Capital, said Fed rate cuts were just “the icing on the cake”. “The fundamentals of the bitcoin price are driven by the introduction of highly regulated companies into the market. Wall Street is coming to adopt crypto,” he added.

The crypto market, known for its booms and busts, has a particular spring in its step after 20 months of negative headlines and painful declines. From a peak of just over $69,000 in November 2021, bitcoin had slumped in value by three quarters to just $16,000 at the start of this year.

Its steady recovery this year gained momentum in November, particularly after US authorities fined Binance $4.3bn for breaching money laundering and financial sanctions. Crucially, it did not shut down the world’s most influential crypto exchange.

That decision has helped draw out the crypto bulls. This week El Salvador’s authoritarian president Nayib Bukele, under whom bitcoin became legal tender in 2021, triumphantly posted on social media site X that the country’s holdings of the digital currency were back in profit. Meanwhile, Brian Armstrong, chief executive of US exchange Coinbase, said he had been contemplating how bitcoin “may be the key to extending western civilisation”.

Some even see the beginning of a new supercycle. Bernstein, the US investment bank, last month predicted bitcoin could more than treble in value to $150,000 by 2025.

Key to the optimism is approval by the Securities and Exchange Commission for exchange traded funds that invest directly in the cryptocurrency.

The market has long viewed a spot bitcoin ETF as a way to tap US retail investors, with a cheap but safe and regulated investment product. For a decade the SEC has resisted all applications, arguing bitcoin prices are set on unregulated exchanges and so it cannot give adequate investor protections.

But pressure has been growing on the SEC since it lost a court ruling last summer on its reasons for blocking an ETF application by asset management firm Grayscale. BlackRock and Franklin Templeton are among the well-known names that have filed applications, raising hopes they can bring vast numbers of US retail investors to crypto. A decision from the SEC could come as soon as next month.

“Just improving market access shouldn’t really buoy prices, but I think it does because it’s an explicit nod from the SEC that they approve of bitcoin, at least in some respects,” said James Butterfill, head of research at investment group CoinShares. 

Many investors have already bought cryptocurrencies in anticipation that demand will continue to grow. According to data from CoinShares, there have been 10 consecutive weeks of inflows into digital assets products, a wave of investment that came shortly after Grayscale’s court victory over the SEC.

Speculators hope US regulators’ acceptance of bitcoin ETFs will provide more durable support to prices, in contrast to previous bitcoin rallies, such as 2013, 2017 and 2021, when prices surged quickly only to collapse just as violently.

“This will be the first time there could be true recognition of bitcoin . . . I do think this signifies that, this time, the rally will be more sustained,” Butterfill added. 

Optimists also point to a technical change in the production of bitcoin that, they argue, will sustain demand. In April next year the number of bitcoin that miners receive for verifying cryptocurrency transactions will halve, with the aim of reducing the supply of fresh bitcoins on the market.

“This will be a very strong technical driver for the price of bitcoin as mining becomes more difficult and less profitable, and scarcity continues to increase,” said Tim Frost, chief executive of Yield App, a crypto platform that offers customers yields on digital assets.

In spite of the renewed confidence, some doubts linger over the durability of bitcoin’s rally. Two of the US’s largest ETF providers, Vanguard and State Street, have not filed to list a spot bitcoin ETF. State Street told Financial News in the summer that “there was no investment case for crypto”.

US authorities have said that scrutiny on illicit behaviour in sub-sectors such as the stablecoin market will continue next year.

The SEC has outstanding cases against Binance and US-listed Coinbase, alleging both marketplaces were unregistered exchanges and sold unregistered securities. Victories for the SEC could force many of them to register with the regulator and impose tougher surveillance and transparency on their markets.

Some industry insiders also doubt that the SEC will break the habit of a lifetime and approve a bitcoin spot ETF.

David Mercer, chief executive of LMAX Group, a currency trading venue, said that SEC approval of an ETF was already priced into the market but added that the bigger goal was turning traditional assets such as securities into digital tokens.

“The end game is most of traditional finance being enabled by blockchain in the decades to come, so from that perspective, we’re just at the start,” he added.

But after months of negative headlines and a barrage of enforcement actions, some hope the rally can merely mark a break from the past, rather than kick-starting another bull run.

“We’re focused on breaking out of this orbit we’ve been locked in the last 18 months rather than some astronomical price spike,” said Michael Safai, co-founder of trading firm Dexterity Capital. “Those days are over, or they should be,” Safai added.