Bitcoin: Further Gains Could Be Forthcoming

Summary Bitcoin’s bullish outlook is driven by regulatory acceptance, increased legitimacy, lower interest rates, and a weaker US dollar. The Fed’s interest rate cuts have weakened the USD, boosting Bitcoin as a currency hedge. New ETFs and CEFs tracking Bitcoin have increased investor confidence and broadened its appeal. Both major political parties are showing support for crypto, enhancing its regulatory environment and investor confidence. Main Thesis & Background The purpose of this article is to evaluate the broader equity market and explain why I believe Bitcoin USD ( BTC-USD ) could continue to trend higher in the months to come. As readers are likely aware, this has been a winning play in 2024 – along with many other “risk-on” assets. For perspective, here is BTC’s year-to-date move compared to US equities: 2024 YTD Returns (Google Finance) As you can see, the market has clearly been favoring cryptocurrency and this has propelled BTC back to historic levels, along with other digital currencies. For my followers, this is a follow-up to a positive review I wrote about BTC just under a year ago. This exemplifies that BTC’s run in 2024 has not been an anomaly but back of a longer-term trend higher: BTC Performance (Seeking Alpha) The fact is that BTC has been on a tear for a while and those who agreed with my buy call have been rewarded handsomely. While a victory lap is always fun, what is more important is where the asset trades going forward . In my opinion, the view is still bright ahead because of regulatory acceptance, increased legitimacy among the public, lower interest rates, and a weaker US dollar. I will tackle each of these topics in detail below. Why The Strength? Fed/Interest Rates A Big Reason I will start with a look back at why Bitcoin has been performing so well. There are multiple reasons of course, but a big one has been the weakening US dollar. Due to the Fed’s decision to finally cut interest rates (and the market’s expectation leading up to it that they would do so) assets with a negative correlation to the USD have fared very strongly. This includes commodities, precious metals, bonds, and, as it is relevant here, Bitcoin. This is a fairly simple concept, but its importance cannot be overstated. When the USD weakens, it takes more of said currency to buy the same amount of another asset, all other things being equal. This means that as USD has faced headwinds, investors have rotated into currency hedges (like BTC) to protect the value of their portfolio: USD Index (Bloomberg) This clearly shows the USD is well off its highs and I don’t see it resuming an upward trend any time soon. The Fed is likely to continue with rate cuts and that means investors will want to lock in higher yields in bonds and also shift to USD hedges, such as hard assets and crypto. My point here is not that Bitcoin is the only way to play this. There are a plethora of ways one can approach an environment where the USD is seeing a decline in value. But that doesn’t mean we should ignore its impact on Bitcoin. This is one of a few examples of assets that tend to perform quite well when investors are worried about inflation and a declining dollar. Since that remains top-of-mind for many as we push into Q4, my bullish outlook on Bitcoin continues to stay in place. New Investment Options Push Interest In BTC Another reason I remain a Bitcoin bull has to do with the investment landscape as a whole. After regulatory approval from the SEC – and eventual launching – of a number of ETFs and CEFs that track the spot price of Bitcoin, more investors are warming up to the idea of owning this asset. In my view, this is only a trend that will continue. The legitimacy that comes with these formal fund options will give more people the confidence to buy into this asset class rather than just buying it directly through means like PayPal Holdings, Inc. ( PYPL ) or through other exchanges that haven’t really been time-tested. And this isn’t just my opinion. Recent surveys show the public warming up to Bitcoin in a broad fashion: Public Attitudes on Crypto (The Harris Poll) I see this as a fundamental shift in how the world (and especially investors) will view crypto going forward. It is no longer as misunderstood or as mistrusted as it used to be. As the asset becomes more visible, more regulated, and more on the minds of average investors, the higher the price is likely to climb. This is central to my long-term bull view of Bitcoin. Election A Catalyst? My how times have changed when it comes to the political environment! With 2024 being an election year – and the public having a more favorable view of Bitcoin – it shouldn’t be a surprise that Washington has a more favorable view of it as well! Taking each party, and nominee in turn, we will start with Donald Trump. He has been a recent champion of crypto, quoted as recently saying he wants to make America the “crypto capital of the planet”. This is surely a nod to attract younger and perhaps more tech-savvy voters, two blocks he would be keen to attract to his campaign. But the support goes deeper than just Mr. Trump. In fact, the RNC highlights crypto on its official platform . There is a paragraph highlighting that Mr. Trump will protect the right to “mine Bitcoin” and “ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control”. This is a straight-up endorsement of Bitcoin (and other cryptos) in my view and if it helps either Mr. Trump or the Republican Party in November I find it hard to believe they will switch course on this. If it is successful in attracting votes, I imagine they will stick with their pro-crypto stance. This bodes well for the regulatory environment and should improve investors’ confidence in the space. Shifting gears, crypto lovers will find support among Kamala Harris as well. The Harris campaign released a policy outline that states her agenda will “encourage innovative technologies like AI and digital assets while protecting our consumers and investors”. This is certainly a bid in favor of crypto and is a keen effort to stay on top of the issue and be consistent with the Trump campaign. While the current Biden administration is not considered wildly bullish for crypto given the SEC’s crackdown on the industry following the failure of the FTX exchange, the truth is that Bitcoin has done quite well during the administration and Ms. Harris is a part of it. What I see here is a win-win. Both candidates are either subtly or aggressively courting crypto fans and that is a welcome move for the industry. It is hard to see how this could be anything but positive for prices. Earnings Growth Seen Declining For Mag 7 Another reason to be considering crypto assets right now has to do with the relative attractiveness of equity hedges. As I already noted, Bitcoin has done well alongside many other asset classes this year. That overwhelmingly includes Big Tech and the famous “Mag 7” that have dominated headlines this year. While I am certainly a large-cap US bull – always have been and likely always will be – there are times I favor moving cash into that sector more than others. For now, I remain concerned that concentration in large-cap indices, such as the S&P 500, is not healthy. This means I continue to rotate new cash into alternative strategies at its expense, including through Bitcoin. One reason for this has to do with earnings growth. Importantly, this is still a “good” figure, and I am in no way advocating a bearish stance on US Tech or the Mag 7. Quite the contrary – I own a lot of it! But I am saying that investors would be wise to exercise some prudence here. Equity levels are at all-time highs and earnings growth has slowed. Yes, it is still quite positive, but it is well off the highs we saw in 2023: ESP Growth (FactSet) In relative terms, we can see that earnings growth has come down by a decent clip. It remains in healthy double-digit numbers but helps justify why diversification should be on the minds of most investors. With concentration risk elevated and earnings slowing, thinking outside the box is probably a good move to wrap up 2024. That could include an asset like Bitcoin, or many of the other hedges I have discussed in prior reviews. Bottom line Bitcoin has been one of my best calls over the past year and I have room to believe more gains are on the way. This upward trend is due to multiple factors, including regulatory changes, improving public sentiment, lower interest rates (here and abroad), and also an increase in institutional adoption. The last point is actually an important one because it helps explain the widening breadth of those investing in this space. For example, a recent study conducted by Ernst and Young showed a majority of financial professionals holding 1% or more of assets under management in the world of crypto: Percentage Allocated To Crypto (Financial Professionals) (E&Y) These are the types of graphics I find so revealing because while it may seem that currencies such as Bitcoin are still a fringe investment idea, it is actually very mainstream. In fact, more people are warming up to it than the opposite, suggesting the best days are still ahead. Hopefully, this review gives my followers confidence in the future of Bitcoin and will give everyone some food for thought as we push into the final stages of the year.

Source: Seeking Alpha