Since the announcement by the Chicago Mercantile Exchange (CME) to launch bitcoin futures contracts, the price of bitcoin has rallied by over 215 percent from $6,200 to over $19,800 in only six weeks. This rally was further fuelled when the U.S. CFTC approved the bitcoin futures contracts and the CBOE announced that it would follow suit and also offer bitcoin futures on its exchange. By receiving official approval from a major financial regulator, bitcoin has finally become accepted as an alternative asset class.
This has not only sparked more institutional investors interest in the digital currency but has also led private investors to jump on the opportunity to potentially generate above average returns by choosing to invest in bitcoin instead of stocks. Exploding private investor interest can be seen by the popular bitcoin wallet and exchange platform Coinbase temporarily becoming the most downloaded iOS app on the App Store surpassing downloads of apps such as Instagram, Facebook, and Snapchat.
While bitcoin holders are rejoicing about the incredible year-end rally that bitcoin is experiencing, many holders of alternative cryptocurrencies and digital tokens are positioning themselves to benefit from a possible altcoin rally off the back of bitcoin’s success — but should they be?
Will Altcoins benefit or suffer from Bitcoin futures?
2017 has been the year in which bitcoin finally become mainstream. However, it has also been the year in which the cryptocurrency market as a whole has moved into the public light. Thanks to bitcoin rallying, investors took notice of altcoins in Q1/2017, which led to an incredible altcoin rally that had its first peak in June.
This altcoin rally was also heavily fuelled by the boom in initial coin offerings and the popularity of many of its newly issued digital tokens as well as bitcoin investors’ desire to diversify into other cryptocurrencies. After the August 1 hard fork that created bitcoin cash, the focus of the cryptocurrency market briefly went back onto bitcoin while the altcoin market struggled to maintain its June all-time highs. By September, however, leading altcoins such as Dash (DASH), and litecoin (LTC), and monero (XMR) were able to surpass their June highs.
Since the CME and CBOE announcements to launch bitcoin futures, the entire crypto market received a massive boost. While bitcoin benefitted the most, all leading altcoins have managed to reach new all-time highs with ether (ETH) hitting $750, litecoin (LTC) hitting $300 and Dash (DASH) surpassing the $1,000 mark.
However, now that bitcoin has been officially sanctioned as an investment asset class will bitcoin’s performance decouple from the altcoin market for which there are no futures and no exchange-traded investment vehicles providing exposure to them? Bitcoin futures could affect altcoins in two ways. Bitcoin could become the dominant go-to digital asset for institutional investors, which would lead to a continuance of its impressive price rally and, thereby, attract more investors while altcoins struggle to receive the same attention.
To drill down a little — Institutional investors have specific investment constraints, which dictate what they can and cannot invest in. One of these constraints is that they can only invest in regulated securities. Hence, mutual funds and pension funds, for example, have found it near impossible to invest directly in bitcoin or other digital currencies. With the approval of bitcoin futures and the existence of other regulated bitcoin investment vehicles such as the bitcoin exchange-traded notes, institutional investors have been able to gain exposure to bitcoin.
This has, however, not been possible for ether or litecoin, for example, as there are no investment vehicles currently available for them. Hence, it could be argued that bitcoin may decouple from the altcoin market thanks to institutional investor money boosting its price.
However, it’s hard to envision bitcoin becoming the sole focus of future digital currency investment as the popularity of digital assets increases and the earning potential of altcoins become more apparent to investors. Indeed, investors could choose to take bitcoin futures as a stamp of approval for the entire crypto asset universe and start diversifying heavily into the most liquid altcoins directly.
While bitcoin will likely receive the most institutional investment in the coming months, it will likely only be a matter of time until we see ether or litecoin futures trading on exchanges. Furthermore, by approving bitcoin futures, it appears the doors may be opening again for the potential approval of a bitcoin ETF as both the VanEck and Rex ETFs, have refiled for SEC approval earlier this month.
“it is unlikely that the rest of the digital asset market will not be integrated with the global financial markets in the long run — as its potential for high returns is simply too alluring..”
Certainly, there is a business case for ETF providers to not only issue bitcoin ETFs but to also issue altcoin ETFs or a crypto asset ETF that includes a basket of the leading digital currencies. The potential inflows a digital currency could receive when an ETF is issued on it are substantial and it is hard to imagine that ETF issuers would give up on the opportunity of issuing a wide range of digital asset ETFs in the future if regulators allow them to do so.
Then, there are the hedge funds, which have no issue with investing directly in altcoins. In the past eleven months, for example, over 75 new digital currency-focused hedge funds have been launched to capitalize on the booming digital asset market. As these funds see more inflows from investors, the altcoin market will benefit greatly as hedge funds look for “the next bitcoin” to invest in.
While the ICO market has cooled down and most newly issued tokens have been underperforming bitcoin, leading altcoins have been rallying aggressively as the year is coming to a close. Due to their liquidity and historic performances, many of the leading altcoins found in the top 20 largest cryptocurrencies by market capitalization are well-positioned to attract new inflows as many investors believe that more money can be made in the altcoin market than in the quickly maturing bitcoin market.
Whether bitcoin will pull away from the rest of the digital asset market or not remains to be seen. In the near term, that’s definitely a possibility. However, it is unlikely that the rest of the digital asset market will not be integrated with the global financial markets in the long run — as its potential for high returns is simply too alluring.