Bitcoin’s Q4 Setup: Record ETF Performance And Powerful Tailwinds

Collectively, the launch of the spot Bitcoin Bitcoin Exchange Traded Funds (ETFs) has been the most successful ETF debut in history. A couple of key milestones stand out: No other ETF had experienced $3 billion of inflows in its first month, Bitcoin had two—Blackrock's IBIT and Fidelity's FBTC. Altogether, Bitcoin ETFs have attracted an impressive $17 billion of inflows during their first nine months, shattering the previous full year record by QQQ Invesco QQQ Trust of $13 billion¹. IBIT also achieved another milestone by maintaining the 10th longest inflow streak on record, with 71 consecutive days of positive inflows from its launch.

This record-breaking period shows the importance of the Bitcoin ETFs and their unique ability amongst financial assets to generate massive inflows. Although inflows have slowed in recent months, they have still outpaced bitcoin’s price action. While bitcoin's price has consolidated within a descending channel since March, inflows have continued to build.

The divergence between flows and price may provide key insights into this consolidation period and future price movement. First, it suggests that ETF buyers are relatively price-insensitive, continuing to accumulate positions despite price declines. Second, these investors are less likely to panic-sell, potentially cushioning the downside during corrections. Third, market corrections can occur through sharp price drops or prolonged consolidation, and ETF holders appear to be steering bitcoin toward the latter, resulting in extended periods of stability. Finally, while inflows tend to correlate with price increases, their steady accumulation builds pressure, gradually pushing bitcoin through key resistance levels.

This week, bitcoin's price broke through one of those key resistance levels, hitting 8-week highs and marking the first higher high since March. This move has sparked excitement for a potential end-of-year rally.

Bitcoin ETFs are transforming Bitcoin’s fundamentals. As arguably the most successful ETFs ever launched, they are setting the stage for an explosive fourth quarter for bitcoin.

Bitcoin Moves Into Q4 With Many Bullish Catalysts

Historically, the fourth quarter has been Bitcoin’s most bullish period, averaging 88.8% returns. This trend is even more pronounced during halving years, such as 2016 and 2020, when Q4 returns averaged an impressive 113%.

As we move into Q4, Bitcoin is positioned to benefit from multiple tailwinds beyond just ETF inflows. Last week, the SEC fast-tracked approval for options trading for IBIT months ahead of schedule, marking the first such approval for a spot Bitcoin ETF. These options will be listed on Nasdaq ISE and are expected to attract more investors by offering additional ways to gain exposure to bitcoin. While further regulatory approvals are required before the options are officially listed, market analysts such as Eric Balchunas, senior ETF analyst for Bloomberg, are very optimistic. Balchunas wrote on X, “Huge win for the bitcoin ETFs (as it will attract more liquidity which will in turn attract more big fish).”

Further adding to the positive outlook, the ongoing FTX bankruptcy proceedings are anticipated to inject significant capital into the market in the fourth quarter. Creditor distributions, which may total up to $16 billion, are anticipated to start in early October. Rumors of immediate October 1st payouts remain speculative, however, their latest press release confirmed that final voting results will be presented on October 7, 2024, ahead of the confirmation hearing. With strong preliminary support for FTX's amended Plan of Reorganization from over 95% of voting creditors, the plan aims to return 100% of bankruptcy claims. These payouts are in U.S. dollars, and a large percentage is expected to flow back into the market, with Bitcoin likely receiving the largest share.

Fed Rate Cuts and Global Central Bank Easing

These Bitcoin-specific catalysts are unfolding alongside another major development—the Federal Reserve's first interest rate cut since March 2020. Last week, the Fed reduced rates by 50 basis points during the September Federal Open Market Committee meeting, marking a significant shift toward more accommodative monetary policy.

The Fed's rate cut comes as part of a broader trend. Other central banks, including the European Central Bank, Swiss National Bank, and the Bank of Canada, have also begun cutting rates. Interestingly, the People’s Bank of China has also initiated rate cuts and large-scale economic stimulus, despite not participating in the coordinated tightening seen in other regions. This raises the question: would we have ended up in the same economic situation regardless of central bank actions? That might be a discussion for a future post.

Nevertheless, the central banks’ pivot toward cutting rates adds a tailwind for Bitcoin in the medium term. This dovetails with the rising global M2 money supply, which further fuels risk-on sentiment. While central bank cuts usually reflect worsening macroeconomic conditions, they can boost markets in the short term by creating a more favorable environment for risk assets. We’re already seeing global M2 break to new highs.

As we head into Q4, Bitcoin finds itself at the crossroads of several powerful market forces. Historical trends point to strong performance in the final quarter, especially during halving cycles. This time, Bitcoin is further buoyed by regulatory progress, potential capital inflows from FTX distributions, and a more accommodative global monetary policy. Together, these factors suggest Bitcoin ETFs could gain renewed momentum and potentially see record-breaking inflows as the year closes. With price action starting to align with ETF flows, the conditions are ripe for a highly bullish end to 2024 for Bitcoin.