Summary Despite recent volatility, the iShares Bitcoin ETF has outperformed the S&P 500, showcasing crypto's resilience and potential for future gains. Regulatory changes and a crypto-friendly SEC leadership could enhance Bitcoin ETF efficiency, making IBIT more appealing and reducing costs for investors. Short-term volatility persists, but demand-supply dynamics and miners' HODLing behavior support a bullish outlook for Bitcoin and IBIT by 2025. IBIT offers a convenient way for investors to gain crypto exposure without direct ownership hassles, benefiting from BlackRock's management and liquidity. After a 15% dive from its mid-December peak of $60.7, the iShares Bitcoin Trust ETF ( IBIT ) trades around $53.5. It has heftily outperformed the S&P 500 this year, showing crypto's resiliency in a highly volatile year, as highlighted by the orange chart below. seekingalpha.com After the election of a crypto-friendly President and powerful rhetoric like elevating Bitcoin ( BTC-USD ) to become a national reserve asset, its value crossed the psychological $100K level about two weeks back. However, Jerome Powell's subsequently making unfavorable comments about the Fed's ability to hold digital assets, and sounding hawkish on monetary policy did send prices lower. In such a context, while volatility risks should persist in the short term, this thesis aims to paint a bullish outlook for 2025 based mainly on demand-supply economics. Also, after recent comments by one of the SEC’s commissioners, there is likely to be a policy shift towards crypto which may enhance BTC's appeal and improve the tracking efficiency of ETFs investing in the digital asset. Changes in Crypto Regulations Could Benefit IBIT First, looking at the leadership change at the SEC (Securities and Exchange Commission), the current Chair Gary Gensler is preparing to vacate his position. While he can be credited with approving several Bitcoin ETFs in January this year, this came only after he faced legal pressure. For this matter, a U.S. appeal court ruled in favor of Grayscale's application to convert its Bitcoin Trust into a spot ETF in August 2023, a move that was initially opposed by U.S. regulators. Therefore with Gensler's departure, there are expectations of a more supportive regulatory environment for crypto investments. This is especially so because Paul Atkins who has been nominated by President-Elect Trump as his replacement has experience in financial services including crypto and regulatory compliance since he served as one of the SEC's commissioners from 2002 to 2008. Also, he currently leads Patomak Global Partners, a financial compliance consultancy company, and is co-chair of the Token Alliance , an industry-led initiative of the Chamber of Digital Commerce. Since the alliance focuses on connecting crypto exchanges with blockchain projects, it shows Atkins' commitment to fostering innovation in the blockchain-based payment world. Tellingly, this is an area where the U.S. is behind other developed countries, and, in addition to providing more balanced regulatory oversight (in contrast to his predecessor), Mr. Atkins possesses the qualifications necessary for making sweeping changes. Thus, from strict regulation , regulators may be more open to deep crypto-related regulatory changes, a possibility supported by Commissioner Hester Peirce who indicated that under new leadership, the SEC may revise key decisions on crypto ETFs and in-kind redemptions . Well, these would allow ETF investors to redeem (sell) their shares for the underlying digital asset, for example, Bitcoin instead of going through cash. In other words, in-kind redemptions could enable the exchange of ETF shares for crypto, which could then be transferred to a wallet. This is also synonymous with more efficient transactions and eliminates costs (trading and taxation) associated with cash transactions for those wishing to convert their Bitcoins to ETF shares As a result, this can improve tracking efficiency or the degree to which an ETF's market price is aligned with its NAV. In this way, IBIT can track Bitcoin price movements more closely potentially reducing the 20% performance gap as shown below. seekingalpha.com Looking further, direct exchanges of ETF shares for crypto could potentially enhance liquidity in the ecosystem, in turn leading to lower costs for fund managers namely by avoiding the buy/sell spreads normally associated with converting Bitcoins to cash. Consequently, if these cost savings are passed on to investors, in-kind redemptions could lead to lower expense ratios, but this ultimately depends on the funds' structure and objectives. Volatility Risks are likely to Persist in the short term but Therefore, innovation, whereby Bitcoin is used for purposes other than storing value, can lead to more demand while in-kind redemption can increase efficiency gains in turn increasing the appeal of spot ETFs like IBIT. However, this cannot happen overnight or just by changing one rule. The reason is in-kind redemption introduces other challenges like having sufficient Bitcoin liquidity (compared to cash before), especially during volatile market conditions. The reason is a liquid market reduces the bid-ask spread and increases the efficiency of the trading experience each time there is a transaction, or a buy at the offer or sell at the bid. Also, for the mechanism to function well, the custody risks associated with transferring large volumes have to be addressed to avoid incidents like the Ronin Network hack (2022) involving $600 million worth of coins being lost. In the same vein, using blockchain and cryptocurrencies to allow people to transact directly should also incorporate risk mitigation strategies because of scams and hacks and millions of dollars of losses suffered. Therefore, it may take some time before crypto-friendly measures are implemented and in the meantime, due to high expectations, there may be further volatility, a possibility supported by the price situated below the 10-day moving average and the RSI of 55 being overbought territory at the time of writing (chart below). The momentum (www.seekingalpha.com) However, looking beyond the short term, as far as Bitcoin trades above the $80K break-even level, miners who are essential components of the ecosystem as the producers of digital assets should continue to stay profitable. Demand-supply economics is Favorable to Digital Asset Prices This suggests they can obtain relatively more cash per Bitcoin they sell on the open market to finance their operations, in turn allowing them to HODL or hold more coins in their treasuries, thereby reducing supply. Ultimately, this supports digital asset prices. On the other hand, Jerome Powell has said that the Fed cannot hold Bitcoins, which somewhat goes against Trump’s intent of creating a strategic Bitcoin reserve. This may have reduced crypto allure in the minds of some investors and possibly contributed to BTC falling off its mid-December peak of $106K. Another contributory factor that also negatively impacted the broader market is interest rates likely to stay higher longer in 2025 as the fight against inflation lingers on. This makes the cost of capital dearer for miners planning to refinance or invest in new and more efficient equipment. Thus, in case asset prices fall further, miners may be constrained to sell more Bitcoins, resulting in more supply and pressurizing prices. However, this is currently not the case with a top crypto analyst stating that the BTC market is increasingly dominated by the HODLing sentiment since miners believe its value will go higher. Now, in the rapidly shifting dynamics of the crypto market, miners HODLing their Bitcoins is key as it means less supply is likely to reach the markets, implying that as long as demand is sustained, asset prices could rise. To come up with an estimate, I consider that currently, Bitcoin hovers around the $96K level which is near my prediction of $95.4K calculated some six weeks earlier in my previous thesis on the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO ). At that time, I used a multiplier of 9.18%, a figure obtained after accounting for past inflows, liquidity conditions, and price elasticity. Again, using the same multiplier and incrementing BTC's current value of 96K by 9.18%, I obtain a target of $104.8K or roughly $105K. Making the case for an investment in IBIT, Amid Volatility Now, by holding Bitcoin directly, IBIT tracks the digital asset's price movements closely. Thus, its shares should also gain, but, this time, I multiply its current share price of $53.5 by 7.34% (or 80% of 9.18%) to take into account IBIT's approximately 20% of deviation from Bitcoin's price. Hence, I obtained a target of $57.4, which represents only a modest upside of around 7% but is justified because of the risks. www.ishares.com One of these could be momentum-related or failure to sustainably break through the key resistance level of $100K, thereby causing selling pressure. Second, Bitcoin remains rate-sensitive not only because higher borrowing costs impact the finances of miners as mentioned earlier but also because higher interests could shift investor mindset to becoming more risk-averse. Thus, they could dump riskier digital assets like Bitcoin alongside growth stocks like tech and flock to value stocks. Third, with the investment products around BTC growing in sophistication, hackers may be tempted to target more vulnerable components of the ecosystem including crypto wallets, and exchanges. Talking of exchanges, any occurrence of an FTX-style scandal can be highly detrimental to the trust factor. Fourth, any news update about Bitcoin used for illicit activities as earlier emphasized by Gensler may undermine regulatory efforts to bring changes, especially innovation. Still, we are at a uniquely favorable juncture for Bitcoin with a Republican- controlled Congress , increasing crypto ownership among Americans, ETF-led adoption, and strong network effects, implying the cryptocurrency can rise further. Add to this drastically lower Bitcoin issuance, or the number of units awarded to miners which has dropped to around 412 daily from 943 before the April halving, implying more scarcity. Equally important, a more favorable regulatory environment could increase the efficiency of ETF transactions and reduce costs. For this purpose, IBIT is already trusted by many who want crypto exposure but without enduring the hassles of direct ownership, such as subscribing to an exchange and owning a wallet. Finally, another advantage is it is managed by giant asset manager BlackRock ( BLK ) and comes with better liquidity and trading volumes given its sizable assets under management. This is more than 2.5 times higher than its two closest peers Grayscale Bitcoin Trust ETF ( GBTC ) and Fidelity Wise Origin Bitcoin Fund ( FBTC ) as shown below, making it easier for large investors to enter or exit positions. www.seekingalpha
