Bitwise CIO Matt Hougan believes that US Federal Reserve Chair Jerome Powell’s recent dovish comments could ignite a new bull market for Bitcoin.

Hougan, in an Aug. 27 note to investors, emphasized that Powell’s statement has alleviated some of the uncertainty surrounding Bitcoin.

On Aug. 21, Powell hinted that interest rate cuts are imminent. This message has sparked optimism among investors, who believe lower rates will benefit Bitcoin.

Why Bitcoin will rise

Hougan noted that Powell’s remarks signal the start of a rate-cutting cycle in 2024-2025. According to him, the CME futures now predict a 100% likelihood of a rate cut at the September meeting, with a potential 200 basis point (2%) reduction over the next year.

Historically, such rate cuts have been favorable for risky assets like Bitcoin. Hougan explained that lower rates reduce the discount factor used to calculate long-term asset values, which tends to drive prices higher. Additionally, rate cuts tend to invigorate market sentiment.

As a result, Hougan believes that sidelined investors might now take action, given the clearer market outlook. He stated:

“One of the oldest sayings in investing is ‘Don’t fight the Fed.’ It’s typically used to warn investors against buying stocks and other risky assets when the Fed is raising rates. But the saying works in reverse as well. When rates are coming down, ‘Don’t fight the Fed’ means ‘don’t sit on the sidelines while risky assets go up.’”

Hougan acknowledged that the bull market might not be straightforward due to ongoing uncertainties. These include the upcoming US elections, potential Mt. Gox and US Government Bitcoin sales, and the possibility of Securities and Exchange Commission (SEC) enforcement actions before the fiscal year ends.

Despite these concerns, Hougan believes that Powell’s statement will mark the beginning of a “new era” for BTC.

Osprey funds

Hougan’s bullish prediction followed his firm plans to acquire rival Osprey Bitcoin Trust’s assets.

According to an Aug. 27 statement, Bitwise will acquire OBTC assets for an undisclosed amount. Osprey’s website shows that its trust had over $123 million in assets under management as of August 26.

Under the deal, OBTC unitholders will receive BITB shares in a liquidating distribution. The deal is also designed to be tax-free for OBTC unitholders under US federal income tax laws.

Osprey Funds stated that further details will be provided in a registration statement to be filed with the SEC.

The transaction is expected to close later this year, pending customary closing conditions.

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Bitwise CIO Matt Hougan highlighted a notable increase in institutional investments in Bitcoin exchange-traded funds (ETFs) during the second quarter despite BTC value declining 12% over the three months.

Hougan highlighted the increased interest in his latest Aug. 20 note to investors, where he stated:

“Bitcoin’s price fell 12% in Q2 2024 and many wondered if that would spook institutions out of the market. The answer was a resounding ‘no.’”

Historic adoption rate

Hougan emphasized that institutional adoption of Bitcoin ETFs is occurring at an unprecedented pace.

According to him, the number of institutional investors holding Bitcoin ETFs grew by 14% quarter-over-quarter, rising to 1,100 from 965. These investors now control 21.15% of the total assets under management (AUM) in Bitcoin ETFs, up from 18.74%. By the end of Q2, institutional holdings in Bitcoin ETFs totaled $11 billion.

Despite 112 investors exiting their Bitcoin ETF positions during Q2, 247 new firms entered the market, resulting in a net addition of 135 institutional investors.

Hougan noted that the level of adoption of Bitcoin ETFs is comparable to the early growth of Invesco’s QQQ ETF, which launched in March 1999. Notably, the BTC ETFs have attracted 3x as many institutional buyers within just two quarters.

Hougan addressed concerns about comparing Bitcoin ETFs as a group to individual ETFs, stating that individual Bitcoin ETFs still dominate. For example, Bitwise’s Bitcoin ETF — ranked fourth by AUM at the end of June — had more institutional holders (139) than SPDR’s GLD ETF (118) at the same stage in its development.

Considering these numbers, Hougan concluded:

“We shouldn’t let the historic adoption of Bitcoin ETFs by retail investors obscure the fact that they are also gaining institutional traction faster than any other ETF in history.”

Portfolio expansion

The Bitwise CIO predicted that institutional exposure to the flagship digital asset would increase over the years.

According to him, while the median institutional investor currently allocates only 0.47% of their portfolio to Bitcoin, this figure could exceed 1% within a year. He explained that professional investors tend to gradually increase their crypto exposure, often starting with 1% or less but eventually raising it to 2.5% or even 5% over time.

Hougan added:

“Year 1 can be a challenge, but momentum tends to build into Years 2, 3, 4, and 5. I expect the same thing to happen here.”

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Bitwise CIO Matt Hougan predicts that the upcoming spot Ethereum ETFs will drive the digital asset’s value to new all-time highs, surpassing $5,000.

In a June 16 note to investors, Hougan wrote:

“By year-end, I’m confident the new highs will be in. And if flows are stronger than many market commentators expect, the price could be much higher still.”

However, Hougan mentioned that ETH’s price might not rise immediately after the ETFs launch next week because “money may flow out of the $11 billion Grayscale Ethereum Trust (ETHE) after it converts to an ETP.”

Still, Hougan emphasized that spot ETFs usually generate new demand for commodities like ETH. He referenced the launch of similar products for Bitcoin, which led to a price increase of around 25% since January 11 and about 110% since October 2023, when the market began anticipating their approval.

Why ETH could reach a new high

Hougan outlined three structural reasons why the inflows into spot ETH ETFs will have a more significant impact than they did for BTC.

First, he claimed ETH’s short-term inflation rate is 0%, unlike Bitcoin’s 1.7% when its ETFs began trading. This means BTC needed “$16 billion of Bitcoin buying per year just to tread water.” With ETH, the situation differs as “people using Ethereum-based applications—everything from stablecoins to tokenized funds—consume ETH as well.”

Hougan highlighted the correlation between “the amount of ETH being consumed” and network activity, noting it presents “another lever of organic demand working in [ETF] investors’ favor.”

Furthermore, Hougan pointed out that Ethereum’s price does not have to deal with the threat of “miners’ selling” because its stakers do not need to sell before making profits. ETH stakers are investors who have locked up a certain amount of their coins to help the network operate smoothly.

He wrote:

“A key difference between Bitcoin mining and Ethereum staking is that staking does not have significant direct costs. As a result, Ethereum stakers are not forced to sell the ETH they produce. Even if Ethereum’s inflation rate rises above 0%, I do not expect significant selling pressure from stakers.”

Additionally, Hougan pointed out that approximately 40% of the Ethereum supply is locked in staking and smart contracts, making it unavailable for sale.

So, Hougan reiterated his prediction that ETH ETF assets under management could reach $15 billion within their first 18 months of trading and concluded that:

“ETH is currently trading at ~$3,400, just 29% below its all-time high. If the ETPs are as successful as I expect—and given the dynamics above—it’s hard to imagine ETH not challenging its old record.”

[Editor’s Note:

Data from ultrasound money shows that Ethereum’s inflation rate is now above zero percentage, coming in at 0.466% over the past 24 hours and 0.595% over the past 30 days. However, since The Merge it has recorded a negative 0.136% inflation due to ETH being burned through transaction fees, making it deflationary over 1 year and 306 days. 

Hougan’s argument regarding Ethereum’s inflation ultimately relies on the network’s consumption. High transaction numbers lead to high amounts of ETH burned and, thus, lower inflation. Yet, the surge in layer-2 usage due to lower fees has resulted in fewer mainnet transactions over the past few months, thus pushing Ethereum back into inflationary territory.]

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Bitwise CIO Matt Hougan has predicted that the impending spot Ethereum exchange-traded funds (ETFs) will see a $15 billion net flow within their first 18 months of trading.

Hougan shared this forecast on June 26, basing his prediction on Ethereum’s market capitalization relative to Bitcoin, data from international ETP markets, and the potential influence of the carry trade strategy.

However, he acknowledged the possibility of net outflows from the ETH ETPs after the initial launch, considering traders involved in discount arbitrage aggressively redeem their positions from Grayscale Ethereum Trust (ETHE). A similar trend was observed from Grayscale’s Bitcoin Trust when the Bitcoin ETFs were launched in January.

Despite this, Hougan believes the Ethereum ETPs will succeed because the underlying asset is one of the best-performing assets ever.

BTC and ETH relative size

The Bitwise CIO explained that he expects investors to allocate funds to spot Bitcoin and Ethereum ETFs in proportion to their market caps, which are currently $1.26 trillion and $432 billion, respectively. This suggests a weighting of around 74% for Bitcoin ETFs and 26% for Ethereum ETFs.

Hougan furthered that US spot Bitcoin ETF’s assets under management (AUM) should increase to at least $100 billion by the end of 2025 as these products mature and gain approval on platforms like Morgan Stanley.

Considering this, Hougan stated that Ethereum ETFs must attract $35 billion in 18 months to reach parity. However, when Grayscale Ethereum Trust’s $10 billion AUM is removed, the figure drops to $25 billion.

International ETP

Hougan noted that data from the European Bitcoin and Ethereum ETP markets revealed AUM ratios of 78% for Bitcoin and 22% for Ethereum products. In Canada, these figures stood at 77% for Bitcoin and 23% for Ethereum.

According to him, the similarity in asset splits between the two regions suggests that this distribution reflects the relative demand for Bitcoin and Ethereum among ETP investors. Hougan stated:

“The fact that the split is roughly in line with the relative market capitalization of the two assets adds to my confidence that this kind of break-down reflects “normal” demand.”

Using Europe’s 22% market share as a proxy, Hougan adjusted his expected net flows from $25 billion to $18 billion.

Carry trade

Hougan also highlighted “the carry trade” as one important factor impacting Ethereum ETF flows. A carry trade is a trading strategy in which investors arbitrage the difference between an underlying asset’s spot and futures prices.

The Bitwise CIO noted that around $10 billion of spot Bitcoin ETF AUM is tied to this trading strategy. However, he doesn’t expect spot Ethereum ETFs to follow the same pattern because “carry trade is not reliably profitable in ETH for non-staked assets.”

He added that he does not expect carry trading to impact the AUM of spot Ethereum ETFs. Considering this, Hougan cut his estimate for net inflows into spot Ethereum ETFs to $15 billion.

According to him:

“[This number] would be a historic success [as] only four ETFs launched since January 2020 have gathered $15 billion in flows.”

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