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ETF Hopes and Lower Chinese Influence Push New Bitcoin Highs

Investing - ETF Hopes and Lower Chinese Influence Push New Bitcoin Highs

At the beginning of January 2017, we witnessed a scenario similar to that of November 2013, when bitcoin first surpassed the $1,000 mark and its rally was subsequently halted by Chinese authorities, followed by a steep price decline in the months to follow.

On January 1, 2017, the price of bitcoin surpassed the $1,000 mark for the first time in three years, peaking at $1,153.86 on January 5. Almost as soon as the new three-year high was hit, it was announced that the Chinese central bank, the People’s Bank of China (PBOC), was meeting with China’s largest bitcoin exchanges Huobi, BTCC and OKCoin to discuss future regulations and issued a public warning against the risks of trading bitcoin. This was followed by on-site inspections at the three bitcoin exchanges to investigate for potential money laundering, market manipulation and unauthorized financing. This sent the price of bitcoin plummeting down back to $761 on January 12.

Bitcoin Is Maturing as an Asset Class

Despite the similarity in price movements to November 2013, bitcoin is now showing signs of becoming a more mature asset class. After the initial price drop, the price of bitcoin quickly recovered to trade back in the $900s for the remainder of January and surpassed the $1,000 mark again in February, despite new regulations affecting Chinese bitcoin trading volumes.

Chinese exchanges have had to stop their margin trading offerings, and all three exchanges introduced a 0.2 percent trading fee to combat overtrading, as their zero-trading fee model has been one of the key drivers of the large bitcoin trading volumes on Chinese shores.

Furthermore, on February 9, both Huobi and OKCoin announced that they have halted withdrawals after the Chinese regulator threatened to close exchanges that are not complying with currency regulations as they are upgrading their KYC/AML procedures. After this announcement, the price of bitcoin dropped to $956 but recovered again to trade above the $1,000 mark two days later, showing clearly that Chinese influence on the price of bitcoin is weakening.

Not only are the previously inflated trading volumes on Chinese exchanges dropping, but volatility has also reduced, due to the overall reduction in bitcoin margin trading as Chinese regulators have halted this practice on Chinese shores.

New All-Time High in Anticipation of Winklevoss ETF

As Chinese bitcoin influence is lessening and the price of bitcoin is becoming more stable, bitcoin reached a new all-time high on February 23, surpassing the $1,200 mark for the first time since bitcoin’s inception in 2009.

While a range of drivers can be highlighted for the current price surge, such as increased bitcoin demand from emerging markets countries, bitcoin-positive news in mainstream media, high price predictions for bitcoin by market experts and a maturing bitcoin ecosystem, the most prominent reason for the current price surge is the anticipation of the U.S Securities and Exchange Commission’s (SEC’s) decision on the Winklevoss Bitcoin ETF.

Should the SEC approve the public listing of the Winklevoss Bitcoin ETF with the proposed ticker COIN on March 11, this could potentially give bitcoin a massive boost in price if institutional investors choose to buy the ETF for portfolio diversification. If the Winklevoss ETF receives approval then it is likely that other bitcoin ETFs, such as the Bitcoin Investment Trust and SolidX, will also be approved. If institutional investors end up pouring money into these ETFs, the funds will need to purchase bitcoins underlying the fund boosting its price.

Despite that the chances of a bitcoin ETF receiving SEC approval are perceived as being rather slim, the upside potential for bitcoin, should an ETF be approved, is substantial. According to boutique investment bank Needham & Company, if the Winklevoss ETF receives approval and amasses $2 billion assets under management, the price of bitcoin is estimated to reach around $3,200 per coin.

Given the huge upside price potential of a Bitcoin ETF approval and limited downside as the price of bitcoin has been stabilizing, it is not surprising that more traders are buying bitcoin and, thereby, pushing up the price as bitcoin’s current risk/return ratio is positively skewed toward the upside.