BlackRock's plans for a bitcoin fund have helped push the world's largest cryptocurrency to its highest in a year, but rising interest rates and a regulatory crackdown could choke off the rally, analysts and industry insiders say.
Bitcoin jumped more than 15% last week, rising above $30,000 for the first time since April, its best week since March, in large part driven by BlackRock filing an application with the U.S. Securities and Exchange Commission to launch an exchange-traded fund (ETF) backed by bitcoin.
If approved, a bitcoin ETF from the world's biggest asset manager could attract investors reluctant to buy the high-risk cryptocurrency directly.
The industry has been hit by a loss of investor confidence and heightened regulatory scrutiny this year after a series of collapses at major crypto firms in 2022 left investors saddled with losses.
In a market driven by sentiment, with sky-high valuation predictions not uncommon, the crypto industry saw BlackRock's application as a sign that Wall Street is coming round to bitcoin, a view bolstered by the launch of a crypto exchange backed by Citadel Securities, Fidelity Investments and Charles Schwab.
But economic stresses could thwart hopes for a sustained rally, analysts say. Bitcoin's gains slowed towards the end of the week, and on Monday it was trading at $30,405.
"Sticky inflation and economic recession concerns are still longer-term risks that we have to be cautious about," said Youwei Yang, chief economist at bitcoin miner BTCM.
"From our perspective, and based on conversations with sell-side desks, this rally was led by institutional buyers," said Wes Hansen, head of trading and operations at crypto hedge fund Arca.
At crypto broker Genesis Trading, "dozens" of top-tier clients have increased their exposure to bitcoin following the BlackRock filing, said Gordon Grant, managing director of sales and trading.
A spot bitcoin ETF could rebuild investors' confidence in their ability to move U.S. dollars in and out of cryptocurrency, after the collapse of crypto lenders Signature, Silvergate and Silicon Valley Bank in the United States earlier this year, Grant added.
"The market is now pricing an ability to put a significant amount of fiat - if there is the volition to do so - into bitcoin, and that is such a significant development."
Luuk Strijers, chief commercial officer of crypto derivatives exchange Deribit, said that he'd seen a significant increase in call buying, pointing to "bullish momentum."
To be sure, the SEC has yet to approve BlackRock's application and it has so far rejected proposed ETFs that track bitcoin from the likes of Fidelity and Cboe Global Markets. The SEC has cited concerns about market manipulation in such products. Digital asset manager Grayscale had its proposal for a spot bitcoin ETF rejected last year.
"In previous spot ETF rejections, the SEC has cited concerns about market manipulation, and BlackRock's application appears to take a different approach to address this sticking point," said Riyad Carey, a research analyst at Kaiko.
LESS CAPITAL OVERALL
After surprise rate hikes in Australia and Canada, and as the Federal Reserve forecasts two more hikes, investors are now betting that interest rates will remain higher for longer.
Bitcoin had benefited from ultra-low interest rates, which incentivised investors to take riskier bets in search of returns.
Genesis Trading's Gordon Grant said higher rates mean investors can get returns in other assets.
"A lot of liquidity, nominally, has been withdrawn from the system... There's just less capital overall, and not only that, cash is now no longer trash."
Although bitcoin has recovered from last year's low of $15,479, it still trades at less than half of its all-time high of $69,000, reached in late 2021.
Analysts say prices have also been depressed by regulatory uncertainty, as the SEC is increasingly cracking down on what it sees as a culture of rule-breaking across the industry. The SEC earlier this month sued major exchanges Coinbase and Binance.
"The uncertainty around SEC activity had led to softness around price action, with Blackrock coming out “in support” it feels a little different," said Usman Ahmad, CEO of Zodia Markets, the crypto exchange of the venture arm of Standard Chartered and Hong Kong crypto firm BC Technology.
"Albeit - there are likely to be further challenges with interest rates continuing to increase," he said.
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