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Overview
Bitcoin’s supply is capped at 21 million units, a characteristic that has drawn the interest of countless investors as evidenced by the more than $25 billion flowing into spot exchange-traded funds (ETFs) since the beginning of the year.
This surge in demand is occuring at a time when bitcoin’s supply is becoming increasingly constrained. More than 19 million units of the digital currency have been mined and the percentage of bitcoin available for trading on exchanges recently fell to the lowest amount in more than six years, according to Glassnode data.
Plus, the amount of new bitcoin issued by the network will drop from 900 to 450 units per day this month as part of a pre-programmed supply reduction called the “halving,” which occurs every four years. The halving is scheduled to occur on April 16, 2024, according to Coinbase. All of these factors could lead bitcoin’s price to top $100,000 by the end of 2024.
Background
It took more than 10 years for the Securities and Exchange Commission (SEC) to approve an application for a spot-based bitcoin ETF. This pent-up demand led to record-breaking debuts for the products issued by blue chip firms like BlackRock, Fidelity and Invesco. The 10 new spot bitcoin ETFs now have $35 billion in assets under management, most of which is new inflows.
New bitcoin ETFs have brought in more than $35 billion in net new demand
BloombergKey Statistics
In the several weeks since the government agency approved these ETFs (on January 11), these funds have already been demanding far more bitcoin than miners produce, according figures calculated using data from BitMEX Research.
According to a graphic posted on X (formerly Twitter) by BitMEX Research on April 4, which shows the daily net inflows into spot-based bitcoin ETFs, these funds provided a total demand of 216,469 units of bitcoin between January 11 and April 3 (inclusive).
The chart below illustrates these figures:
Net inflows into bitcoin ETFs
BitMEXWhile there are 57 trading days during the aforementioned time frame, there are 84 calendar days. If you divide the total demand for bitcoin during this period (216,469) by the number of calendar days, you get a figure of 2,577 units per calendar day.
This is the average daily demand associated with these funds in the several weeks since the SEC gave spot-based bitcoin ETFs a green light. This figure is already about 2.86 times the amount of digital currency that bitcoin miners create every day (900 units).
When the halving takes place, and the rate of supply drops to 450 units per day, these funds will be purchasing approximately 5.7 times as much bitcoin as miners supply on a daily basis, assuming the average daily demand figures cited above remain steady.
If net inflows into these spot-based bitcoin ETFs increase, which could happen given that many large asset management platforms have not yet onboarded these products, the figure could be significantly higher later in the year.
The aforementioned supply-demand dynamics are also taking place at a time when the fraction of bitcoin available for trading on exchanges recently fell to 11.75% of total supply, the lowest since December 2017.
The chart below, which was provided by Zhuokang Feng, portfolio manager & head of trading for Blockforce Capital and cites Glassnode data, illustrates how this metric has changed over time:
Bitcoin's percent balance on exchanges is its lowest in years
GlassnodeOutside of these dynamics, It is important to note that halvings have historically been bullish in their own right. In the roughly 150 days following the 2016 and 2020 halvings, bitcoin prices climbed close to 16% and 24%, respectively, according to Coinbase data.
Outlook and Implications
Demand for bitcoin is likely to continue outstripping supply for the foreseeable future. Bitcoin ETFs’ current demand for the digital currency already exceeds the new supply being generated by miners by a factor of roughly 2.8-to-1. But that is an underestimation of total demand.
“This does not include the bitcoin purchased by anyone directly on exchanges,” Brett Munster, portfolio manager for Blockforce Capital, emphasized via email. As a result, the disparity between demand and supply is more severe than the factor of 2.8-to-1 referenced above, he noted.
“In April, the daily issuance of new bitcoin will be cut in half to an average of 450 per day,” Munster noted. This would create a ratio of roughly 5.7 times (2,577 units of bitcoin purchased vs 450 newly issued units of bitcoin). “Again, that is only taking into consideration bitcoin purchased through the ETFs and not bought directly on exchanges,” he emphasized.
But what could make this halving boost even more explosive is the fact that current holders are not selling like they did during past cycles.
“During the large run ups of 2010, 2013, and 2017, the supply available to be traded was increasing,” he emphasized through emailed comments. “Contrast that to today. This will be the first full cycle in which the available supply on exchanges will be decreasing.”
Are Investors Front-Running The Supply Crunch?
One possible explanation for why net inflows into bitcoin ETFs have been so high over the last several weeks is that market participants are front-running the expected post-halving price jumps.
However, most of the analysts questioned for this research report were skeptical that this is the case. Munster offered a rather direct reply to whether market participants are engaging in front-running, stating “I don’t think so. In our conversations with investors, most investors are not aware of the supply crunch and are surprised when we show them the on-chain data.”
“From our conversations, most investors are allocating to bitcoin for two main reasons,” he said via email. “First as a hedge against further currency debasement resulting from our debt growing at an exponential pace. Second, bitcoin has a low historical correlation to traditional asset classes and increases the diversification of a portfolio.”
Tim Enneking, managing partner of Psalion, a crypto venture capital firm, also voiced his doubts, stating that net inflows are “Probably not” higher right about now as a result of market participants front-running the supply crunch.
“It is still so very difficult for a neophyte to invest in crypto, and so easy with an ETF, that I think the bulk of the demand is being driven by (1) ease of use and (2) the implicit acceptance of crypto (or at least BTC) by regulatory authorities,” he said via email.
Post-Halving Trading Patterns
Investors should not be surprised if they see bitcoin struggle immediately after the halving, both due to historical patterns and the asset’s struggles to definitively break through the $70,000 threshold.
“This is the fourth halving and the pattern after the first three is: run up to the halving, a bit of a drop off and sideways movement for a couple quarters after that, and then the real bull market begins,” Enneking stated. “If the market follows that pattern after this halving, the real bull market will begin in Q4 of this year and continue well into 2025.”
Amid these developments, he made some optimistic predictions about where the digital asset’s price will go in the next few years. More specifically, the analyst expressed significant confidence that bitcoin prices will reach $100,000 in 2024.
“I would be astonished if we don’t see six figures this year and come to see $100k as the absolute floor in 2025,” Enneking said. When asked when bitcoin’s bull market might peak, he said, “Based on prior halving cycles and the overall bull and bear cycles in BTC, I would say late Q3 or early Q4 of 2025.”
Ways To Invest In Bitcoin
If investors think that demand for bitcoin will indeed increase over time, causing price appreciation, this could be a great time to gain exposure to the digital currency, something they can do by making a direct purchase through a cryptocurrency exchange, brokerage firm like Robinhood or Fidelity and even PayPal and Block. Of course there are 11 U.S. based ETFs to choose from as well.
Another way interested parties can gain exposure to the cryptocurrency is by purchasing shares of bitcoin covered-call ETFs, which offer returns by purchasing the underlying digital asset and then selling call options on it. The Roundhill Bitcoin Covered Call Strategy ETF (YBTC), for example, offers investors exposure to both the cryptocurrency’s upside and also income generated from writing call options. By selling these call options, which grant the purchaser the right, but not the obligation, to buy some of the bitcoin owned by the fund for a predetermined price within a specific time frame, the ETF generates premium income.
Investors who are interested in obtaining exposure to bitcoin’s potential upside can do so by purchasing shares in companies like MicroStrategy (MSTR), which has generated countless headlines through its purchases of the digital currency and is up 110% this year. By comparison bitcoin is up 50%. Earlier this month, CoinDesk reported that the company owns roughly 205,000 units of bitcoin.
Another option, though less direct,would be buying shares in Coinbase (COIN), an exchange that offers a wide range of services, allowing market participants to buy, hold, trade and stake their digital assets. It is up 53% in 2024.
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