Bitcoin is poised for another strong quarter, but fiscal and monetary policy could shake things up. The crypto market is going to see two widely anticipated catalysts play out over the April-June period: the Bitcoin halving, which historically precedes a bull run to new highs; and a decision by the Securities and Exchange Commission on spot ether ETFs, following its approval of bitcoin ETFs in January. The most important driver in second quarter for bitcoin and crypto, however, could be the Federal Reserve decision on interest rate cuts. “The fundamental reason why people buy [crypto] assets is because of a demand for a store value and an alternative to the dollar, and the dollar’s most important fundamental might be the level of short-term interest rates set by the Fed,” said Zach Pandl, head of research at Grayscale Investments. At the end of last year, the Fed signaled that interest rate cuts are coming. Since then, however, inflation data has picked back up, raising questions about the timing of rate cuts. Traders are now pricing in a roughly 61% chance of a first Fed rate cut taking place in June, according to the CME FedWatch Tool . “If the Fed is not cutting rates, I think we need to revisit a lot of our market views,” Pandl said. “If the Fed is cutting rates despite a strong economy despite somewhat high inflation … That is very encouraging, that’s very positive for the asset class.” BTC.CM= YTD mountain Bitcoin (BTC) YTD Bitcoin is on pace to end the first quarter up 66%, according to Coin Metrics, and notch a 13% gain for March – despite a brief 17% pullback from its all-time high reached just days before. Cryptocurrencies trade 24 hours a day, seven days a week. The second quarter tends to be one of strength for bitcoin, finishing it in the green in seven of the last 11 years since the cryptocurrency’s inception, according to CoinGlass. “I continue to be optimistic about the outlook,” Pandl said. “The base case is a soft landing in the U.S. economy, Fed rate cuts despite somewhat firm inflation and a contentious presidential election, which could introduce additional downside risks to the dollar, depending on the candidates’ statements and positions that we hear over the course of the quarter.” “The things that have got us here we don’t think have materially changed,” he added. “Measures we would use to try to scale where we are in the bull market look like they’re only middle of the way through … we think price is probably still moving higher in Q2.” A potential demand shock Part of what propelled bitcoin to new records in March was the continued success of spot bitcoin ETFs, which launched in the U.S. for the first time in January. Demand has increased from 40,000 bitcoin at the start of the year to 213,000 bitcoin currently, largely driven by ETF buying ahead of the late April Bitcoin halving, according to CryptoQuant. Meanwhile, the bitcoin supply is already constrained, and the halving — an event mandated in the Bitcoin code that reduces the bitcoin mining reward by half to limit the supply — hasn’t even taken place yet. CryptoQuant estimates the present bitcoin sell-side liquidity inventory is only enough to cover demand at its current rate of growth for 12 months. That could lead to big increase in bitcoin price and volatility if it continues down this road. “Around 27,000 bitcoin are being issued on a monthly basis, which is about 12% of monthly demand at current demand growth rates,” CryptoQuant head of research Julio Moreno said. “After the halving, the new bitcoin being issued would only cover 6% of current demand. Of course, this is assuming demand stays this strong.” The halving has become a widely watched catalyst, as each of the last three in bitcoin’s history have been followed by monster returns in the months following. Investors will be watching to see what effect it has on the price this year with the newfound demand via ETFs. “Every time we have a halving it’s half as much, so the supply is going to get cut in half again but not as much as before,” Chris Kuiper, head of research at Fidelity Digital Assets, told CNBC. “There’s some debate as to whether it’s going to have as big of an impact as before or whether the previous halvings had a much bigger impact because they had a supply shock. “[There] may be not as much of a supply shock this time around but I think we have a bigger demand shock this time,” he added. “We’ll so how those two play against each other.” Moving the market Grayscale’s Pandl said that in the short term the halving is at most a symbolic event. “The halving is something that is has been scheduled since Bitcoin was created in 2009, something that has been widely talked about so I would be surprised if the halving date were a market moving event,” he said. “It’s a really important event in the sense that it is a reminder about bitcoin’s, predictable monetary policy and how that contrasts with the uncertain outlook for fiat currencies.” However, the SEC’s decision on whether or not to allow spot ether ETFs to trade, due in May, will “very likely” be market moving, he added. Pandl also pointed out that although he believes the funds will be greenlit, the consensus according to prediction market Polymarket is that they won’t be. Grayscale is one of several firms, including Fidelity and BlackRock, in line with the SEC for approval to launch an ether ETF. “If it’s not priced in today, then it very likely will be a market moving event if it happens,” he said. —CNBC’s Ganesh Rao contributed reporting.
