Buy On the Rumor and Sell On the News With Bitcoin?

Bitcoin is seeing quite a nice rally. The prospect of the US Federal Reserve stopping interest rate hikes seems to be part of this. Another factor appears to be the expectation that the Securities and Exchange Commission will soon give the green light to those wanting approval for exchange traded funds that track the spot price of Bitcoin. Just how much either or both of these things would help Bitcoin is uncertain. It occurs to us that one might buy on the rumor and sell on the news with Bitcoin.

Bitcoin Goes Back Above $38,000

Many believed that Bitcoin was down for the count when it bottomed out at the end of 2022. It has more than doubled in price, coming from $16,000 to more than $38,000. Meanwhile the Nasdaq has come from a 2022 year-end bottom of $10,200 to $14,281 at the end of November in 2023. This is a nice 40% increase but not the more than doubling that Bitcoin has experienced. Throughout the year the previous correlation between Nasdaq and Bitcoin has weakened and, at times, turned negative. Thus, factors that drive the stock market like interest rate cuts and the economy are not all that is driving Bitcoin. The spot Bitcoin ETF issue seems especially important in driving Bitcoin investor and trader sentiment. Will that optimism be rewarded when the SEC finally grants approval?

How Important Are Interest Rates for Bitcoin?

As a general rule, higher interest rates deter speculative investing. Lower interest rates encourage speculative investments. We saw this throughout the years after the Financial Crisis when the United States had years of historically low rates. Money in bank CDs, corporate bonds, and US Treasuries paid pathetically low rates of interest. However, the stock market generally gave nice returns and money invested in cryptocurrencies early on paid spectacular returns. To the degree that a pause of lowering of interest rates encourages “risk on” investments, dollars will flow into Bitcoin. Rate cut expectations appear to be part of the current Bitcoin rally.

How Important Will Spot Bitcoin ETFs Be For Bitcoin?

The potential for there to be spot price ETFs for Bitcoin is unique to that asset. Thus we are seeing price appreciation for Bitcoin that is not replicated in the stock market or anywhere else. The question we have is just how important spot Bitcoin ETFs will be. It turns out that there is already a Euronext Bitcoin ETF that tracks the spot price. At least in that market, which is tied to the New York Stock Exchange, there has been no Bitcoin rally!

When Spot Bitcoin ETFs Are Approved Will Bitcoin Rise or Fall?

There is an old adage in the stock market. Buy on the rumor and sell on the news. The point is that the market gets all excited about a coming event like an IPO for a new company or an upcoming announcement by the US Federal Reserve. The sum total of this excitement is seen in an individual stock or the whole market rising. When the event happens it becomes clear that the price of the stock in question has been driven far higher than its fundamentals will support over the longer term. Thus, the stock falls in price. It went up on the rumor and fell on the news. Those jumping into the current Bitcoin rally should remember this bit of advice. As we noted there is already a spot Bitcoin ETF on the European market and it has not experienced the sort of dramatic trading that folks seem to expect in the USA. Spot Bitcoin ETFs may well be very useful for investors who have no interest in having a crypto wallet but would still like to invest in Bitcoin. The question that remains is if these folks are going to jump into coming ETFs and buy regardless of price. That happened prior to crypto winter and we see where that got us.

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