The Impact Of Macroeconomic Factors On Bitcoin ETF Performance And Stock Market Linkages

In the wake of the U.S. Securities and Exchange Commission (SEC) approving the first of many U.S.-listed spot Bitcoin Exchange Traded Funds (ETFs) back in January 2024, the watershed moment has opened the floodgates for investors, seeing millions in capital being poured into the market in the days following the approval.

After years of deliberation, and giving multiple applications the thumbs down, on January 10, the SEC approved 11 applications, including those from BlackRock, Ark Investments, Fidelity, Invesco, and VanEck.

Yet, despite advocates and regulators calling on the risks of these instruments, in the weeks following the approval, trading volumes of spot Bitcoin ETFs could surge past $100 billion, according to Yahoo Finance. Similarly, BlackRock, the world’s largest asset manager, achieved a major milestone, amassing more than $10 billion in assets under management for its spot Bitcoin ETF, the fastest than any other ETF in U.S. stock market history.

Analysts are growing increasingly optimistic with the potential trajectory of spot Bitcoin ETFs now publically available on the market, citing that broader accessibility could help to drive price stability and lower volatility. Tom Lee, founder and head of research at FundStrat Global Advisors said in an interview with CNBC that a bullish forecast for Bitcoin could see prices escalate towards $150,000 within the coming 12 to 18 months.

As crypto markets continue to hold strong performance, analysts are now beginning to consider the wider macroeconomic conditions that could influence the short and near-term performance of spot Bitcoin ETFs. With uncertainty looming overhead, and central banks looking to begin loosening monetary policies this year, investors are closely eyeing the macroeconomic factors that could influence the performance of Bitcoin ETFs and the broader crypto market.

Macroeconomic Factors Impacting Crypto & Bitcoin ETFs

The premise of the Bitcoin Exchange-Traded Fund allows investors, both novice and seasoned, the ability to access regulated ways of investing in Bitcoin currencies, without having to endure the complexities of holding the cryptocurrency itself. Instead, investors will help to minimize their short and long-term risk exposure, while simultaneously diversifying their portfolios with “alternative investments.”

However, like publicly traded stocks and fiat currencies, crypto, and now more importantly Bitcoin ETFs can be affected by economic turbulence due to the globalized and decentralized nature of how these instruments are being used.

Recession

Cryptocurrencies, and perhaps BTC ETFs are not an exception when talking about economic prosperity and retraction. Periods of economic volatility, including poor government policies and decreased demand for equities could drive prices of crypto down, as investors are more willing to hold their position and alleviate their risk tolerance during recessionary periods.

Conversely, investors may hold their crypto assets, or BTC ETFs as these are not tied to any country or central bank, allowing them increased fluidity within a market downturn. In such an event, BTC and other cryptocurrencies may offer an alternative for preserving purchasing power, including for those instances where countries may have adopted crypto as a legal tender.

The opposite could also be true. For instance, in countries where inflation has severely decreased the purchasing power of fiat currencies, such as in Turkey (Turkish Lira) or Nigeria (Nigerian Naira), crypto could hedge the inflationary pressures, due to the decentralized nature of these currencies.

Broader economic circumstances hold a close correlation in the relationship between crypto assets and a recessionary environment, driving demand during inflationary periods, and causing an increase in prices of spot cryptocurrencies and potentially BTC ETFs.

Economic Expansion

On the contrary, where capital inflows and favorable market conditions provide investors with a high-risk appetite, cryptocurrency growth could see a correlation amidst economic expansion and a higher yield environment.

Increasing monetary easing by central banks throughout the last decade has helped increase the money supply of investors, further allowing them greater capital access to asset markets.

With the adverse reaction of Quantitative Easing (QE) taking place, and investors having better forward-looking market expectations, cryptocurrencies could closely resemble those market reactions, driving prices higher, as demand for riskier assets continues to build momentum.

The outcome is that a healthier global economy and better forward-looking economic conditions on a federal level could help fuel cryptocurrency and potentially BTC price offset.

During these periods of expansion and growth, investors would generally look towards more riskier assets to generate bigger returns and allocate more capital towards these sorts of investments.

These favorable conditions should have a positive impact, similar to what we experienced in the years following the launch of the first spot Gold ETF. During the time, gold ETFs had around $1 billion in assets under management (AUM), although this had quickly risen to more than $50 billion in the years following. This, along with the positive economic conditions, and higher demand helped push the price of gold to new heights in the years afterwards.

Inflation & Interest Rates

In many instances, the correlation between inflation, interest rates, and cryptocurrencies is a seemingly complex and highly sophisticated relationship that often leaves investors unsure over the possibility that crypto could be used as a hedge within an inflationary environment.

Various scenarios come into play, for one being that demand for BTC ETF assets could drive up prices in an inflationary environment, and where government monetary policies see Quantitative Tightening (QT) of existing federal fund sheets.

Although the track record to help prove the validity of this is still too short, the relationship between crypto, BTC ETFs, and economic factors should rather be associated in terms of an overheating economy, following traditional expansionary periods.

Where the case may be that fiscal monetary policies increase disposable incomes and capital inflow above sustainable levels, leading to demand-driven inflation, further capital investment in high-risk assets, such as BTC ETFs or crypto could help investors generate bigger returns, but would simultaneously drive prices higher due to demand.

Something else to keep in mind is that as inflation begins to heat up, and central banks begin to raise interest rates in an attempt to counter the economic reaction, higher costs of borrowing could quickly dry up reserves for crypto companies and smaller startups.

High inflation and interest rates can hurt investors and their profits being adjusted for these conditions. This could often put Bitcoin, and other cryptocurrencies up in the spotlight as being a safer alternative investment opportunity, where investors can retain value preservation and growth.

Key Factors Influencing Crypto Assets & Bitcoin ETFs

Outside of traditional macroeconomic factors, several other influencing considerations need to be carefully examined in the coming years as we begin to learn more about the relationship between the cryptocurrency market and spot BTC ETFs.

Market Confidence

Better confidence and favorable market conditions can help drive investors' appetite for high-risk investments, including taking on alternative assets, such as crypto or BTC ETFs, as compared to traditional liquid assets.

Adoption

As central banks across the world begin to look for ways to introduce crypto as a more substantial financial instrument and introduce crypto within the wider economy, adoption of these currencies could help further reflect positive attitudes towards the overall acceptability and the position of cryptocurrencies in modern economies.

Technology

The existing technology used to create decentralized currencies and the use of blockchain applications help to layer transactions among users, creating new opportunities to transact with cryptocurrency more freely, and without potential barriers. This could help drive up demand, which could eventually increase the cost of cryptos, however, the higher cost of mining BTC and other cryptos could create longer-lasting challenges for the market and lower marginal profits.

Liquidity

As with anything, supply and demand remain a big determining factor and a strong driver of prices. For starters, a higher interest rate environment could restrict investors from investing in crypto startups or mining companies, leading to an overall decrease in availability of miners, and a shorter supply of cryptocurrencies. More than this, the ability to physically hard-cap crypto, especially BTC at 21 million means that as demand increases and supply shrinks, prices will continue to move higher.

Bitcoin Halving

Every four years, Bitcoin miners’ rewards are halved, as part of a unique Bitcoin protocol mechanism. Bitcoin halving helps to reduce the rate of new BTC entering market circulation, allowing for better entrance to market opportunities for novice buyers.

Historically, BTC halving has seen prices remain fairly bullish, as supply suddenly decreases, while demand remains high, attracting interest from investors, and many looking towards building strategies that would include a straightforward approach that would allow them to access new supplies of BTC, and steadily increase demand and prices at the same time.

While this requires a lot of time and patience, investors are likely to stick with purchasing new BTC supplies throughout a halving cycle, allowing them to have renewed excitement for BTC development.

This renewed attention helps bolster price appreciation for BTC, as investors begin to have a bullish approach toward high-risk assets, due to decreased prices, low supply, and strong demand.

Regulation

Although cryptocurrencies aren’t bound to one central bank or government, this wouldn’t necessarily mean that regulatory influence could dictate the direction in which prices would move over time.

In fact, regulatory challenges during the last several years have meant that Bitcoin and cryptocurrency performance has been faced with high levels of volatility and uncertainty, largely driven by central government policies.

One recent example of this is China and Russia looking to move away from the U.S. Dollar as a currency of trade, and rather begin to rely on a decentralized cryptocurrency that could help to open more capital markets for developing nations and help reshape the inflow of decentralized financing.

Other examples are countries such as El Salvador and the Central African Republic introducing Bitcoin as an official legal tender, allowing residents to transact, pay, and purchase goods or services using Bitcoin.

There are negative attributes as well, such as governments creating laws to restrict residents from using Bitcoin or any other forms of crypto at large. In Turkey, the central bank introduced laws to restrict the use of Bitcoin following the collapse of the Turkish Lira, as officials were fearful that citizens would abandon the fiat currency for a decentralized currency.

As governments across the world begin to better understand the nature of BTC and how citizens can effectively use these decentralized currencies within the wider economy, better laws can be drawn up to help establish new incentives for using these currencies and better regulate the flow of digital assets within capital markets.

Drawbacks Of Bitcoin ETFs & Stock Market Linkages

Although the introduction of a BTC ETF is a step in a new direction for the crypto market, experts argue that there remain major drawbacks of these financial instruments and the wider decentralized sector.

Volatility

Bitcoin, and perhaps crypto remains a highly volatile asset that is highly price sensitive to market movements including macroeconomic factors. Although a BTC ETF could help with overall crypto adoption, there is still a lot of volatility that can easily, and without warning push prices in any sort of direction, leaving a lot of uncertainty on the table.

Bitcoin ownership

Purchasing BTC ETFs only means that investors are investing in a spot ETF, which allows them some exposure to BTC prices, including other crypto-based assets. However, this doesn’t mean that investors would have physical ownership or custody over any crypto or BTC for that matter.

Regulatory changes

With more crypto-focused assets making their way onto the market, regulators could introduce new laws and impose possible restrictions on securities to help regulate the flow of crypto assets within capital markets, and help to stabilize the price correlation between BTC and markets. Any negative regulatory introductions could badly affect the performance of spot BTC ETFs, and drive Bitcoin prices down.

Expense ratio

The cost of holding BTC ETFs could outweigh the physical return on these assets, leading investors to run a loss over the short term. More than this, annual expense ratios could make it more expensive to hold these sorts of investments, compared to physically purchasing BTC and storing this in a digital wallet.

Concluding Thoughts

Bitcoin Exchange Traded Funds are not exempt from the impact of macroeconomic conditions, including factors such as recessionary concerns, periods of inflationary pressure, high-interest rate environments, and economic contraction. The close correlation between BTC ETFs and the crypto market leaves little room for error, and a big opportunity for price volatility during periods of economic change.

Conversely, a positive reaction in the economy, coupled with favorable market conditions and bullish investor sentiment could help provide a stronger long-term outlook for BTC ETF performance, as crypto prices could largely be impacted by larger capital inflow, and investor’s urge to take on riskier alternative investments.

Besides seeing a strong connection with the wider economic environment, BTC ETFs remain a new investment vehicle that requires careful investigation, and investors will need to align their strategies in such a way as to ensure that their investment goals align with new capital opportunities and fundamentally considers the wider impact macroeconomic changes can have on their portfolio when investing in these instruments.