It's a well-known market phenomenon: Stocks tend to go up at the very end of the year, and then again in the first few days of the new year. In fact, this phenomenon is so famous that it even has a name: the Santa Claus Rally. The size and extent of this rally is often used to predict how the market will perform over the next year.
The crypto market, though, has something even better than the Santa Claus Rally as a predictor of performance. There are two big events coming in the first few months of the year that could have a profound impact on the future trajectory of Bitcoin (BTC -1.85%) and other cryptocurrencies. Let's take a look.
The first spot Bitcoin ETF
The first major event is the arrival of a spot Bitcoin exchange-traded fund (ETF) for the U.S. market. Yes, there are already Bitcoin ETF products in the market today, but these use financial derivatives (e.g., futures contracts) to track the price of Bitcoin, and can be unpredictable or inaccurate at times.
A new spot Bitcoin ETF will be backed by the cryptocurrency itself, and will be fully regulated, audited, and monitored. It will look just like any other ETF.
Image source: Getty Images.
In short, the new spot Bitcoin ETF is just about the best holiday present that Santa could possibly give institutional investors. Until now, these investors have been wary about investing in crypto directly, due to its perceived risk and volatility. The spot Bitcoin ETF should solve these problems.
As a result, noteworthy Bitcoin bull Michael Saylor, executive chairman and former chief executive officer of MicroStrategy, recently said that this new financial product could be the biggest thing to hit Wall Street in 30 years.
The good news is that Securities and Exchange Commission (SEC) approval of the first spot Bitcoin ETF could come as soon as Jan. 8, just days after the Santa Claus Rally is fizzling out.
There are several Wall Street firms that have submitted applications, and they are working closely with the SEC to amend and update them as needed. At the very latest, approval should come by the end of the first quarter.
When approval does come, it could result in a tsunami of new money flooding into Bitcoin. By some estimates, as much as $25 billion could flow into it, with much of that headed for the new spot ETFs. And all of that new money could send the crypto soaring.
While the Santa Claus Rally is largely ephemeral, lasting for just a few days, this ETF rally could be persistent and extend for the long term. We're talking about the largest institutional investors in the world, with trillions of dollars in assets under management, deciding to allocate some share of their portfolios to Bitcoin.
The Bitcoin halving
The second major event is the Bitcoin halving, now scheduled for April 2024. In a halving event, the reward paid out to miners for mining a single block on the Bitcoin blockchain is cut by in half. The impact of the halving is generally perceived to be bullish for the prospects of the digital coin.
In fact, the Bitcoin halving rally (just like the Santa Claus Rally) is a well-documented phenomenon. There have been three previous halving cycles (in 2012, 2016, and 2020), and each one has led to a surge in the crypto's price. In the last halving cycle, for example, Bitcoin eventually hit its all-time high of almost $69,000.
Does the Bitcoin halving rally really exist? Even though it has occurred three times, it could just be a statistical coincidence. Correlation does not always imply causality. Or, it could just be an interesting psychological phenomenon, similar to the Santa Claus Rally.
However, there might actually be real economic theory underpinning the Bitcoin halving. By cutting the mining reward in half, the algorithm that controls the pace of new coin creation is increasing the relative scarcity. As long as the demand stays the same or increases, the price of Bitcoin should increase.
Do you believe in Santa Claus?
Some might say that believing in the magical properties of the Bitcoin halving is similar to believing in Santa Claus. Fair enough. But it can still be used as a predictor of the year ahead for crypto, similar to the Santa Claus Rally. If the halving effect fails to materialize, it could augur a bearish year ahead for crypto -- and perhaps for financial markets overall, given that Wall Street is so heavily invested in the launch of those new spot Bitcoin ETFs.
As the economist Yale Hirsch -- who "discovered" the Santa Claus Rally in the 1970s -- said, "If Santa Claus should fail to call, bears may come to Broad and Wall." So keep your eye out for what happens with Bitcoin in early 2024. The future of your investment portfolio could depend on it.
