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- Bitcoin has climbed roughly 117% in 2023.
- Bullishness around a spot bitcoin ETF and 2024's halving event have fueled gains.
- From regulators to stubborn inflation, experts shared what could derail the rally.
Bitcoin, the world's largest cryptocurrency by market capitalization, has climbed roughly 117% this year, handily beating the returns in most other asset classes.
On Wednesday, the token hovered at $36,080. Its supporters have been bullish all year on regulators' potential approval of a spot bitcoin ETF, the 2024 halving event, easing monetary policy, and falling inflation.
However, industry veterans caution that headwinds remain that could mute the enthusiasm and derail the rally.
Here's the bear case for the world's biggest crypto as the market heads into year-end.
'Overdone' optimism for spot ETFs
JPMorgan strategists said the latest rally in crypto market is "rather overdone," and bitcoin may not gain as much as anticipated on spot ETFs or the upcoming halving.
Rather than new institutional products ushering in more investors, JPMorgan maintained they would merely attract flows from existing bitcoin products, like Grayscale's bitcoin trust or mining companies, basically having the effect of shuffling investment around rather than attracting new inflows.
"We envisage this shift as a relative value trade as several of the above bitcoin products trade at a premium or much reduced discount relative to the past," the strategists said.
Even if the SEC approves spot bitcoin ETFs, that doesn't guarantee a lasting change of tune from regulators in favor of crypto, in the bank's view.
To that point, Alonso de Gortari, chief economist at Mysten Labs, told Business Insider that any regulatory updates that restrict access or opportunities for bitcoin could crimp gains for investors.
While Europe and Asia have come out with more accommodative policies in recent months, the US has yet to follow suit, he explained. It would be surprising if Gary Gensler and the Securities and Exchange Commission deny the approval of all spot ETF applications, but the move could send bitcoin — as well as ether and other tokens — tumbling.
"The reason ETF issuance is so important for the industry is that it would sideline many of the custody and security issues inherent to crypto that many investors would like to avoid," de Gortari said. "An ETF would show that blockchain has matured as an infrastructure layer, being the rails that serve digital assets in the backend, while letting investors access these assets through a mature middleware layer."
Macro headwinds
James Butterfill, the head of research at CoinShares, told Business Insider that bitcoin's climb could falter if inflation doesn't fall as expected in the new year.
While Bank of America said Tuesday October's year-over-year CPI reading of 3.2% officially puts an end to the Fed's hiking cycle, any resurgence for inflation would send money from bitcoin into alternatives, and would make it more likely that Fed policy stays tight longer before the central banks shifts to a more accommodative stance.
"This would push treasury yields higher, making them look more attractive relative to bitcoin," he said, noting that he anticipates the US economy to continue heading for a recession in 2024.
Despite some bearish macro developments posing a threat, there is still a strong bull case in 2024's halving event, sources say. Some experts forecast that the halving—which reduces rewards for mining bitcoin by half—could push the token to new record highs above the six-figure mark. The last three halving events have each been followed by record highs within 12 months.
Mysten Labs' de Gortari said over the last two years, innovation has ramped up not just for bitcoin but across the digital asset space, and an increasing number of retail investors are recognizing the upside.