Florian Ginez, Associate Director, Quantitative Research, WisdomTree has written a note overviewing the developments and investor demand for bitcoin in the first half of the year.
“The first half of 2021 was particularly interesting for bitcoin, both in terms of price and developments. Bitcoin entered the year just below USD30,000, growing to USD63,500 in April, hitting a market cap close to USD1.2 trillion, before retreating in the USD30-40,000 price range since mid-May.
“The initial bull run was very much fuelled by positive sentiment that had been building up over the second half of 2020. Many large companies like PayPal had been announcing the integration of crypto onto their platforms. Others were announcing investment in bitcoin onto their balance sheet like MicroStrategy, Square and Tesla. The latter even started accepting bitcoin payments. During this time, Canadian listed bitcoin ETFs began launching, attracting significant money flow, and surpassing the European market in terms of assets under management in a very short time span.
“The market then started to reverse. Elon Musk announced via Twitter that Tesla would stop accepting bitcoin payments on the back of environmental concerns, initiating the down market. In addition to that, China announced a crackdown on mining activity as well as trading in the country, prompting what some dubbed the ‘great mining migration’, with miners now looking to relocate to North America, Europe or Central Asia. Other countries like Iran have been taking similar measures.
“We believe those recent events are not necessarily a negative in the long run. First, the price pullback probably helped cool down what was an overheated market, notably reducing leverage in the system – and providing more reasonable entry points for investors looking for exposure to bitcoin. Secondly, we believe that the heightened concerns around bitcoin’s environmental footprint could be a catalyst for a change in the way miners operate, and progress towards more disclosures and usage of renewable energy. The creation of the bitcoin Mining Council in North America in the wake of Musk’s tweet is one example of a step in the right direction. In a world where environmental, social and governance (ESG) considerations are increasingly important, such development will likely have an impact on investor demand.
“Talking about investor demand, we have been witnessing a noticeable evolution in the type of investors showing interest in cryptocurrencies. We have seen more and more large institutions inquiring about the space, including large banks and asset managers, as well as pension funds and even insurance companies. Most of these actors are still very early in their journey to get the green light to start investing in bitcoin, but this shows large institutions are keeping their eyes open.
“The success of Canadian ETFs further demonstrates investors’ interest for the space. All eyes are now on the US, where a number of crypto ETF applications are queuing at the Securities Exchange Commission (SEC). These include applications for bitcoin ETFs, as well as ether ETFs. The SEC has been delaying their decision on several of these applications over the first half of the year. The second half will show whether the situation evolves or not, and we believe an approval would send a very positive signal to the market. Flows into Canadian cryptocurrency ETFs are often seen as a proxy of the interest that may lie in the US. A bitcoin ETF would help US investors access the space in a familiar and secure way and might attract significant flows.
“Bitcoin continues to make headlines. The first half of the year closed with news of bitcoin becoming legal tender in El Salvador, the first country to take this visionary step. Paraguay seemingly intends to follow suit. The moves are not going to be the last we hear regarding bitcoin potentially becoming legal tender in emerging market nations. Despite the knockbacks digital assets have suffered as a nascent asset, there is plenty for investors to be excited about. We continue to keep a close eye on bitcoin developments and look forward to seeing what the rest of the year has in store for the cryptocurrency.”