Analysis: Fever over BlackRock's bitcoin fund faces chill of rate hikes and regulations

SOLAI

26/06/2023 13:34

By Elizabeth Howcroft
       LONDON, June 26 (Reuters) - 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  BLK.N  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.
    
    BITCOIN'S BUYERS
    "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  STAN.L  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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Pain in crypto land    https://tmsnrt.rs/430AXAu
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 (Reporting by Elizabeth Howcroft, additional reporting by Tom
Wilson, Editing by Louise Heavens)
 ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))