Bitcoin prices hit their highest ever level on Thursday, surpassing £50,000 for the first time.
After peaking in 2021 at the $60,000 mark, it then eventually crashed to around $17,000 last year, but has now recovered.
Jason Hollands, managing director at Evelyn Partners, said that the recent rally had “almost certainly been powered by its adoption into mainstream investment products in the US”.
In January, the US Securities and Exchange Commission approved applications for 11 spot bitcoin exchange traded funds (ETFs) for the first time ever.
Head of research at CoinShares James Butterfill noted that while bitcoin’s value movements were in sync with anticipations of cuts in interest rates, the launch of US spot bitcoin ETFs have “played a pivotal role in the recent price dynamics”
The ETFs have attracted over $1bn in just two days, accumulating $6.8bn since the beginning of 2024.
Unlike futures or derivatives instruments that have been around for a while, spot bitcoin ETFs must actually hold the cryptocurrency, so as money flows into them, they have to buy more of it.
This has left investors, both institutional and private, a way to get exposure to bitcoin without buying them through digital exchanges “whose credibility and safety have been undermined by a variety of collapses and crises,” Hollands said.
While there are 900 bitcoins mined each day, the demand from the new ETFs amounts to around 4000 bitcoins daily, said Butterfill.
James Yardley, senior research analyst at Chelsea Finance Services, explained that a lot of bitcoin is very tightly held, meaning that “a small shift in demand can have a big impact on prices”.
Bitcoin prices have been incredibly volatile, and often unpredictable in their movement, so pinning the spike to just one factor seems like a bad idea.
Laith Khalaf, head of investment analysis at AJ Bell, added that while the spot ETF inflows had certainly helped bitcoin directly, their launches had also come with some associating benefits.
“They also provide a regulatory halo over the cryptocurrency, something which has created concern amongst MPs in the UK,” he noted.
“There has also been a wider risk rally this year, with technology stocks doing particularly well, and that suggests fertile ground for a Bitcoin bull rally,” added Khalaf.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that issuers of the new ETFs were also setting fees low in an attempt to bring new entrants into the market, pushing up prices further.
“The valuation also appears to have been super-charged in anticipation of a halving event taking place in April, which reduces the reward for mining blocks and has in the past fuelled price gains,” Streeter noted.
Yardley also pointed to the upcoming bitcoin halving date, explaining that this will create a supply shock for the cryptocurrency.
The ‘halving’ event has come about as the code behind bitcoin means that only 21 million can ever be produced, and with 19 million already created, halving will slow down the rate that they are ‘mined’.
Ultimately, analysts warned against expecting the price of bitcoin to go up, given how unpredictable it is.
“Questions still remain over the long run adoption of crypto by consumers, businesses and investors,” added Khalaf.
“Its volatility doesn’t help cement its status as a currency, and while there may be an initial sugar rush to buy ETFs, institutional investors are likely to be pretty wary of including crypto in their portfolios.”
“Importantly these ETFs are not available in the UK and our regulator, the FCA, is unlikely to follow the path of the FCA any time soon as is has expressed concerns about cryptocurrencies on multiple occasions,” added Hollands.
“So here, bitcoin traders could be taking on an added, secondary level of risk in terms of the platform that they use to buy crypto-currency, and the fact that their holdings might not be protected by the regulators”