For months, Wall Street investors had been predicting that the price of Bitcoin (BTC 1.86%) would soar as soon as the SEC finally approved the new spot-price Bitcoin ETFs. But this didn't happen. In fact, quite the opposite. The price of Bitcoin is now down to $40,000, and concerns are growing that it could dip even lower.
This is all probably a bit jarring, especially for the first-time crypto investor who expected to become a Bitcoin millionaire overnight. But it's actually part of a pattern we've seen over and over again with Bitcoin, and there's no need to panic now. Let's take a closer look.
Bitcoin and tactical asset allocation
There's been intense media coverage of the new spot-price Bitcoin ETFs, as well as an exhaustive list of possible reasons the price of Bitcoin has dipped in the aftermath of SEC approval. One possible explanation is related to the concept of tactical asset allocation, which simply refers to the process of reallocating funds among different asset classes to take advantage of short-term market situations.
Image source: Getty Images.
In layman's terms, this simply means that money is being shuffled around among different Bitcoin investment products as people search for the best way to get exposure to Bitcoin. The process of doing this, unfortunately, is causing downward pressure on the price of Bitcoin.
Keep in mind that people have different options when they want to buy Bitcoin now. They can invest in Bitcoin proxy stocks (such as Bitcoin mining companies). They can invest in Bitcoin futures contracts. They can buy futures-based Bitcoin ETFs. They can buy Bitcoin directly in the spot market via a cryptocurrency exchange. And they can invest in the new spot-price Bitcoin ETFs.
For the Bitcoin tactical asset allocation thesis to make sense, you would expect to see certain things. You would expect to see people selling off Bitcoin proxy stocks as they look for more direct exposure via the spot-price Bitcoin ETFs. This has happened. You would expect to see people moving out of the higher-cost futures Bitcoin ETFs into the lower-cost spot-price Bitcoin ETFs. This has happened. And you would expect Bitcoin trading volume on crypto exchanges to fall as people instead buy ETFs. This, too, appears to be happening.
From my perspective, this explanation makes a lot of sense if you assume most investors are rational as they search for the best way to invest in a certain asset. Moreover, I find this explanation strangely comforting, because it means that nothing has changed in the grand macro thesis of Bitcoin adoption. It means that there has been no major change in the long-term growth prospects of Bitcoin. The only downside, really, is that less "new" money might be flowing into Bitcoin than we expected. Instead, it's just "recycled" money from other Bitcoin products.
Historical evidence from Bitcoin
Still not convinced? Well, let's consider the historical evidence from Bitcoin and similar types of product launches.
One of the best graphics that I've seen over the past two weeks appeared on CNBC. As Markus Thielen of 10x Research pointed out, the same pattern has occurred with every major launch of Bitcoin-related financial products. A lot of early hype leads to a surge in the price of Bitcoin, followed by a swift downward correction on the actual news.
This happened with the first Bitcoin futures contracts, which launched in December 2017. It happened with the April 2021 initial public offering (IPO) of crypto exchange Coinbase Global (COIN +3.25%), which brought Bitcoin trading to the average investor. It happened with the launch of the Bitcoin futures ETFs in October 2021. And it is now happening with the launch of the new spot-price Bitcoin ETFs in January 2024. If you take a trading chart of Bitcoin and highlight these dates, the trend is unmistakable. Peaks follow listings, with dips in their wake. And the long-term price gains continue after a pause.
CRYPTO: BTC
Key Data Points
While you could argue that correlation does not imply causation, there does appear to be a strong pattern here, right? It suggests that as soon as there is a new way of investing in Bitcoin, people start reallocating their Bitcoin funds, and that causes a short-term price downturn.
Buy the dip on Bitcoin
Long story short: You should buy the dip. Bitcoin under $40,000 is a no-brainer investment opportunity in my eyes. By my analysis, there is simply no way that a sustained surge in new retail and institutional money into Bitcoin won't help to prop up its price. And if many investors decide to allocate just 1% of their portfolio to Bitcoin, that's going to provide long-term price support -- and it's easier than ever to do it thanks to the new spot-price ETFs.
That's why I'm still strongly bullish on Bitcoin. The process of democratizing crypto for the average investor continues, and the spot-price Bitcoin ETFs are a welcome new addition. Yes, it's been messy for the past two weeks, but I'm more convinced than ever that investors need to hold Bitcoin for the long term and learn to embrace its volatility.
