Bitcoin surges, and Vanguard allows trading of some crypto ETFs: CNBC Crypto World

Key Concepts

• Crypto Rebound: A recovery in cryptocurrency prices after a period of decline.
• Spot Crypto ETF: An Exchange Traded Fund that directly holds the underlying cryptocurrency asset.
• Tokenization: The process of representing real-world assets (like stocks, bonds, real estate) as digital tokens on a blockchain.
• Decentralized Finance (DeFi): A financial system built on blockchain technology that aims to remove intermediaries.
• Asset Allocation: The distribution of an investment portfolio among different asset categories.
• Market Structure Bill: Legislation aimed at regulating the trading and operation of financial markets.
• FOMC Meeting: Federal Open Market Committee meeting, where the U.S. Federal Reserve discusses monetary policy.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Altcoins: Cryptocurrencies other than Bitcoin.
• ETP (Exchange Traded Product): A broader term that includes ETFs and other exchange-traded securities.

Crypto Market Update and ETF Developments

The crypto market is showing a rebound, with Bitcoin climbing back above $90,000 and Ether jumping nearly 10% to just under $3,000. Chainlink also saw a significant increase of over 12% to $13.24. This recovery follows a recent sell-off.

Volatility in Bitcoin and Market Dynamics

Tom Farley, CEO of the crypto exchange Bullish, discussed the volatility in Bitcoin. He explained that with approximately 160,000 Bitcoin mined annually, there's a need for an incremental buyer to absorb this supply, valued at roughly $15 billion. He highlighted how MicroStrategy's significant purchases in the first seven months of last year (180,000 Bitcoin) absorbed this supply. However, their reduced buying in the latter five months (15,000-20,000 Bitcoin) led to increased volatility and downdrafts. Despite this, Farley remains a long-term bull, with Bullish holding 24,000 Bitcoin.

Traditional Finance Embraces Crypto ETFs

Several developments indicate growing adoption of crypto ETFs by traditional financial institutions:

• Vanguard's Stance: Vanguard will allow its clients to invest in most third-party crypto ETFs on its brokerage platform. They stated these products have performed as designed through market volatility and maintained liquidity. Vanguard will focus on ETFs holding underlying coins with broad market acceptance, as defined by the SEC, and has no plans to launch its own crypto ETFs. Vanguard is the second-largest ETF issuer globally, following BlackRock.
• Bank of America's Endorsement: Bank of America will begin recommending crypto ETFs to select clients. Their chief investment office will suggest a digital asset allocation of 1-4% for interested Merrill Private Bank and Merrill Edge clients. Advisers can recommend Bitcoin ETFs from various asset managers, driven by growing client demand. This allocation is for investors with an interest in thematic innovation and comfort with elevated volatility. While crypto ETFs were previously available to high-net-worth clients, these select funds will be offered without net worth requirements.

Grayscale's Chainlink ETF Launch and Tokenization Thesis

Grayscale has launched its latest spot crypto ETF in the US, tied to Chainlink. This is a conversion from their existing Chainlink Trust.

The Driver Behind the Chainlink ETF

Zack Pandle, Head of Research at Grayscale, explained that the decision to launch the Chainlink ETF now is driven by Chainlink's central role in the "tokenization vision for markets." He anticipates that tokenized assets, currently a $30 billion industry, will grow into a multi-trillion dollar industry over the next 5-20 years. Chainlink is seen as the software provider that will enable this tokenization by being critical infrastructure for blockchain-based finance and DeFi. As traditional assets like stocks, bonds, and real estate move onto the blockchain, Chainlink is expected to be crucial for this transition. The ETF structure is preferred by investors for efficient investment in this tokenization thesis.

Investment Case for Chainlink

Pandle described the "crypto asset class" or "blockchain asset class" as being related to public blockchain technology and its transformations in digital money and finance. Investors are incorporating these assets into their portfolios for diversified sources of returns, alongside traditional assets like stocks and bonds. Chainlink is presented as an "excellent additional ingredient" to this mix, offering exposure to the tokenization use case, complementing Bitcoin's macro and digital gold thesis, and Ethereum's stablecoin applications.

Expansion of Altcoin ETFs

Grayscale has been active in offering access to various crypto products through private funds. The Chainlink ETF follows recent conversions of XRP and Dogecoin trusts into spot ETFs. Other asset managers are also launching altcoin ETFs in the US, such as Canary Capital's Litecoin ETF. Pandle expects a significant increase in the number of additional altcoin ETPs available in the market next year as regulatory outlook shifts.

However, he noted that institutional investors will be selective, focusing on the fundamentals and use cases of each asset, and will likely invest in assets with strong long-term investment theses, with Chainlink being a prime example.

Factors Influencing Crypto Market Performance

Pandle discussed the factors behind outflows from some ETP products, including the BlackRock Spot Bitcoin ETF experiencing its worst month.

Demand Drivers for the Crypto Asset Class

The crypto asset class is driven by two main fundamental sources of demand:

1. Macro Demand: For alternative stores of value.
2. Regulatory Clarity: Driving institutional investment and adoption.

These pillars of the bull market remain in place.

Short-Term Market Influences

Over shorter periods, markets are influenced by various factors. Recently, there has been a shift in expectations about the US economy, moving from booming to concerns about downside risks and uncertainty in Fed policy. This has affected frontier technology market segments, including crypto. The weakness in price and outflows from ETPs are seen as reflecting a broader shift in investor risk-taking, rather than a change in the fundamentals of the crypto industry.

Potential Bottom and Future Outlook

Pandle indicated early indications that the market may have potentially found a bottom. He believes institutional capital will continue to enter the crypto asset class, supporting valuations.

Factors for Year-End Recovery

Pandle is optimistic about ending the year higher than the current levels. Key catalysts include:

• Upcoming FOMC Meeting: Potential for further rate reductions, leading to more accommodative monetary policy.
• Fed Chair Nomination: The potential appointment of a new Fed chair could signal more accommodative monetary policy.
• Bipartisan Progress on Market Structure Bill: Further progress on market structure legislation, similar to the Genius Act for stablecoins, would be an encouraging sign for the crypto asset class.

He emphasized that while a local bottom may have been reached for the year, investors should focus on long-term fundamentals: macro demand for alternative stores of value and regulatory clarity driving institutional investment. As long as these factors remain, generally rising valuations for the crypto asset class can be expected over time.

Pandle also commented on 2025's digital asset treasury trend, with the full interview available on cnbc.com/cryptoworld.