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Some analysts suggest that the difficulty in acquiring Bitcoin is increasing as ETFs require significant purchases of the cryptocurrency.
Why has Bitcoin surged to record levels this week? Fans of the world's largest cryptocurrency argue that it's due to traditional supply-demand dynamics.
Bitcoin, like any commodity, is highly sensitive to fluctuations in demand. In January of this year, demand for Bitcoin surged following the launch of Bitcoin spot ETFs, allowing direct investment in Bitcoin.
Since then, investors have poured billions of dollars into these ETFs. This influx of funds has led these funds to purchase Bitcoin to meet demand, driving up the price.
Bitcoin's supply is strictly limited
Unlike other commodities, Bitcoin's supply is strictly limited, a dynamic that can lead to significant price increases.
The code supporting Bitcoin specifies a total supply of only 21 million coins, with over 90% already "mined."
To expand the supply, miners mine new Bitcoins by running algorithms. However, they can only mine around 900 new Bitcoins per day, a rate expected to decrease after the upcoming halving event next month. Bitcoin's supply will eventually cease when the last Bitcoin is mined around the year 2140.
Alex Thorn, research director at Galaxy Digital, says:
"Bitcoin is one of the scarcest assets in the world, and it's becoming scarcer."
But as far as price is concerned, there's no guarantee that Bitcoin will continue to rise. The current high price of Bitcoin may encourage holders to sell, locking in profits.
It's worth noting that Bitcoin's previous bull markets have been followed by devastating collapses: after reaching a previous peak in November 2021, Bitcoin fell by over 70% in the following year. Skeptics, including government officials and Wall Street executives, still consider Bitcoin a speculative asset with no intrinsic value.
So far this year, Bitcoin has risen by 58%.
Highly sensitive to demand
In economic terms, Bitcoin's supply is highly inelastic, meaning it doesn't respond to price fluctuations, a characteristic that makes it prone to price volatility. For example, natural gas producers can't significantly increase production in the short term to take advantage of high gas prices.
However, in the long run, sustained high gas prices will encourage drillers to seek new sources of fuel. Similarly, when gold prices remain high for an extended period, gold miners can pursue costly new mining projects, searching for this precious metal in increasingly remote locations.
But Bitcoin doesn't operate this way. The rules in Bitcoin's code dictate the rate at which miners introduce new Bitcoin into the market, a rate that periodically halves. Historically, Bitcoin's price has risen before such halving events, as cryptocurrency investors anticipate a tightening supply.
The idea of Bitcoin having a fixed maximum supply comes from its anonymous creator, Satoshi Nakamoto, who wrote that such a design would shield Bitcoin from inflation.
Steven Lubka, head of private client services at investment firm Swan Bitcoin, says, "Fundamentally, there won't be any additional Bitcoin supply in the market."
This makes Bitcoin highly sensitive to demand growth, and new Bitcoin spot ETFs have been buying significant amounts of Bitcoin since their launch on January 11th. On that day, nine new ETFs debuted for trading for the first time, and an existing fund, Grayscale Bitcoin Trust, converted to an ETF. Since then, nearly $8 billion in net inflows have gone into Bitcoin spot ETFs, with the inflows into the nine new funds exceeding the outflows from Grayscale's Bitcoin spot ETF.
According to investment research firm ByteTree, as of Tuesday, ETFs or other investment funds hold about 5% of the global supply of Bitcoin, up from 4.4% when the US Bitcoin spot ETF began trading on January 11th.
Watch out for selling pressure!
When Bitcoin spot ETFs purchase new Bitcoin to meet investor demand, they typically rely on proprietary trading firms like Cumberland, a subsidiary of Chicago trading giant DRW Holdings, or New York's Jane Street Capital. These companies operate crypto trading desks and scour the digital currency markets for large quantities of Bitcoin to fill the funds' orders.
Some analysts say it's becoming increasingly difficult to acquire Bitcoin from large holders. Public blockchain data shows that a significant portion of the approximately 19.6 million Bitcoins in global supply is held in "dormant" digital wallets that rarely move Bitcoin, possibly because they belong to long-term Bitcoin holders who refuse to sell or because the owners have lost their passwords, rendering their Bitcoin unmovable.
Manuel Villegas, an analyst at Swiss private bank Julius Baer, said in a research report last week that about 80% of Bitcoin supply hasn't changed hands in the past six months. Villegas wrote that, coupled with ETF inflows and data showing limited Bitcoin inventory available for sale on exchanges, this "could exacerbate supply shortages."
Others say there are many sellers willing to sell Bitcoin on rallies, which may be why Bitcoin's upward momentum has stalled after briefly exceeding its 2021 record.
Rob Strebel, head of relationship management at DRW, says Cumberland hasn't had difficulty finding Bitcoin to meet Bitcoin spot ETF demand in recent weeks when ETF inflows have surged. He says the company has acquired most of its Bitcoin from large crypto investors who purchased Bitcoin when prices were lower and are now taking profit. Strebel says:
"When you see a market go parabolic, like Bitcoin, it's a natural selling opportunity. Especially when people remember the last bull market in 2021, they'll take some chips off the table." |
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Post time 15-3-2024 15:59:09