Was fake news about bitcoin ETF a dress rehearsal?

For the first time in a long time, something exciting happened again in the bitcoin market. On Monday, the price suddenly spiked, rising above $30,000 on some exchanges. But the euphoria was short-lived. What was going on? You can read that, and more, in this Weekly.

This Weekly in brief

• Market: For a while, it seemed that the BlackRock ETF had been approved. It turned out to be fake news. The price surge to $30,000 was quickly reversed.
• News: Wealth giant Fidelity argues that bitcoin is unique among all crypto assets. The company sees bitcoin as a starting point for traditional investors. Bitcoin company River reports that its lightning network has grown strongly over the past two years.
• Behind the scenes: We have partnered with the Student Blockchain Association Netherlands. Together, we are committed to increasing the level of knowledge about blockchain and Web3 among students.
  

Cryptomarket

Last Friday was the last day for the SEC to appeal its embarrassing defeat in the case against Grayscale. Three judges ruled unanimously in August that the arguments by which the US securities regulator rejected Grayscale's application were insufficient, calling the rejection "arbitrary and unpredictable". The SEC allowed the deadline to expire, accepting this groundbreaking ruling. Grayscale had asked the SEC for permission to convert the world's largest bitcoin fund into a spot ETF. 

That the rejection has been taken off the table, and that the SEC will not appeal it, is good news. More on that later. First, we turn to an event a few days later.

On Tuesday afternoon at 15:21 Dutch time, Cointelegraph sent out a message to the world saying, "BREAKING: SEC APPROVES ISHARES BITCOIN SPOT ETF". A wave of adrenaline flowed through the crypto world. Would it really happen? Within minutes, the message was picked up by major Twitter accounts and at 15:24, the price began to rise.

Eric Balchunas, ETF expert at Bloomberg, asked for the source of this message at 15:27. A sweeping sign, as he is usually excellently informed. Meanwhile, the price rose from $28,000 to $30,000. That's the highest point since August 9.

Indeed, at 15:32, it turned out that Cointelegraph was wrong. The news site posted an apology on Twitter for spreading 'inaccurate information'. The share price surge came to a subpar end. After a sharp top, the share price began to fall rapidly. Not much later, BlackRock confirmed that their application had not yet been approved. Less than half an hour after the initial message, the share price was back where it started.

What can we learn from this event? To answer that question, we need to discuss the short-term and long-term separately.

The immediate reaction to the news was positive. Everyone has now seen what happens to the share price within a few minutes. It is easy to imagine what the reaction will be when the SEC and BlackRock issue a press release about the actual approval.

But for the long-term effect, we need to look beyond the speculators. In general, analysts expect a spot ETF to increase demand for bitcoin. These three people recently ventured into forecasting new capital inflows:

Eric Balchunas, ETF expert at Bloomberg, arrives at $150 billion. He substantiates this by comparing with gold ETFs and looking at assets managed by financial advisers.

Steven Schoenfield, former managing director at BlackRock, expects some $200 billion of new capital to flow in over three years.

Mark Yusko, CEO of hedge fund Morgan Creek Capital Management, goes a step further and counts on $300 billion.

One is talking about a period of several years. So these predictions do not say that the price of bitcoin will skyrocket immediately after the launch of ETFs. It could well be that most of it will flow into bitcoin ETFs only in a subsequent bull market.

People are talking about a period of several years. So these predictions do not say that the price of bitcoin will skyrocket immediately after the launch of the ETFs. It could well be that most of it will flow into bitcoin ETFs only in a subsequent bull market.

With the actual launch of the ETFs, therefore, we are not just looking at the initial reaction of the price. Those are bound to be very enthusiastic, just like this week. What we find more important is whether the market structure changes materially thereafter.

Currently, we have been sitting between roughly $25,000 and $32,000 for seven months. The rise last Tuesday did not change that. Only when the price finds acceptance above $32,000 can we speak of a substantially new development.

It looks like we will know how it turns out within three months. The SEC's failure to appeal the judge's ruling in the case against Grayscale prompted Bloomberg ETF watchers to adjust their forecast. They now talk of a 90% probability that the ETFs will be approved by 10 January 2024 at the latest!

News summary

As this week's main news was strongly linked to what was happening in the market, we have covered it in detail in the market update. That gives us the opportunity here to highlight two recent publications from prominent bitcoin companies.

We start with the crypto arm of US asset giant Fidelity. In the report 'Bitcoin First', managing director Chris Kuiper writes about the features that make bitcoin special. "Bitcoin is not a payment technology, but a superior form of money. As a monetary asset, bitcoin is unique."

The crux of Kuiper's argument is that investors should clearly distinguish between bitcoin and the rest of the crypto assets available. "These should be assessed in a different way from bitcoin. Traditional investors who want exposure to digital assets should consider bitcoin as a starting point. From there, they can then diversify their portfolio."

We continue with a publication from River. Researcher Sam Wouters periodically reports on the size of the lightning network. To get an idea of that, many people look at the number of connected nodes and payment channels. As these key figures remain stable, it seems like lightning adoption is stagnating. "But our research shows the opposite," writes researcher Sam Wouters. "Growth in the number of users, transactions and volume has accelerated significantly in recent years."

Wouters estimates that at least 6.6 million transactions will have been carried out via the lightning network by August 2023. This is a lower limit, because due to the nature of the network, by no means everything is traceable. "This represents a 1212 per cent growth compared to August 2021," Wouters writes. "It is about 2.5 transactions per second. The growth is largely driven by gaming, donations on social media and streaming."

Wouters calls the growth remarkable, as in the period 2021 to 2023, the price of bitcoin fell 44 per cent and internet users' search interest dropped 45 per cent. "Lightning activity has become much more global, with activity more evenly distributed than last year."

Other news:

• Ferrari is going to accept crypto-currency for payment of new bolides. To do so, it is working with payment processor BitPay. Initially, the payments will be with bitcoin, ether, or stablecoin USDC. "Some of our customers are young investors who have built their fortunes with crypto currencies," Enrico Galliera said in conversation with Reuters. "But we also get the demand from traditional investors who have expanded their portfolio with it." According to Galliera, other companies are going to follow his example.
• President of Madeira opens 'bitcoin business hub' to drive innovation Miguel Albuquerque made the announcement during Bitcoin Amsterdam. "We are changing our economic [base] for technology companies, high-tech, artificial intelligence and of course bitcoin," Albuquerque said. "Anything bitcoin-related is welcome in Madeira." Madeira is one of Portugal's autonomous regions. Some 270,000 people live on the islands.
• Will Uniswap users face mandatory KYC procedures? The operation of the decentralised exchange can be customised with plug-ins; Uniswap calls such software hooks. A KYC hook has recently been spotted, leading to robust debate and criticism of the fate of DeFi applications. Proponents believe it is fine for a central intermediary to hook into an open protocol. "It is just an option and it does not mean that every transaction has to go through the wringer," they say.