The simple economic principle of “supply and demand” may explain the frenzy that has caught the cryptocurrency market collectively, and Bitcoin in particular.
According to Coinshares head of research, James Butterville, while 900 bitcoins are produced daily through mining, orders for newly issued US ETFs amount to an average of 2,800 bitcoins per day.
“This has led to a 28% decline in exchange holdings since 2020, indicating that the market is experiencing a significant demand shock,” Butterville said.
Spot Bitcoin ETFs once again broke the daily trading volume record on February 28, 2024, with the cryptocurrency’s price soaring to $64,000 on some exchanges before quickly falling to nearly $60,000 within minutes.
The intense rally pushed Bitcoin to its biggest monthly gain since December 2020, when the digital token jumped 50% to around $9,600.
The value of the cryptocurrency has more than tripled since the beginning of last year, returning from a 64% decline in 2022, in a notable return from a series of cryptocurrency industry scandals and bankruptcies that raised questions about the viability of digital assets.
Cryptocurrencies are jumping even though investors have reduced their expectations for a more flexible monetary policy this year, as evidenced by a rise in US Treasury yields. Bitcoin will outperform traditional assets such as stocks and gold in 2024.
Michael Savai, co-founder of quantitative trading firm Dexterity Capital, said: “This reversal is very impressive in light of central banks signaling that they intend to keep interest rates high for longer, eroding the theory that the next cryptocurrency price rally will be driven by a reduction in interest rates. interest rates”.
This comes as massive inflows into Bitcoin ETFs have prompted some industry observers to warn of a looming supply squeeze, as new cryptocurrencies from miners cannot keep up with demand. About 80% of Bitcoin supply has not been traded in the past six months, which could exacerbate the squeeze and increase upward pressure on prices, analysts said.
The nine new spot ETFs hold more than 300,000 BTC, or 7 times the amount of new coins mined since January 11. After the expected halving in late April, the number of new coins mined daily will decrease to 450 from the current 900. If this demand remains steady, with the supply of new coins cut in half, proponents expect the price to have room to rise.
“All of this combined creates an imbalance between supply and demand,” said crypto hedge fund founder Dan Slavin. “More demand than supply means a higher price, and with Bitcoin prices so volatile, a higher price doesn’t mean 10%, it means a lot more.”
Butterville added: “The rise in Bitcoin prices to a high of $64,000 raised curiosity about the factors that led to this increase.”
“Until recently, Bitcoin prices were closely aligned with expectations of interest rate cuts, but have since diverged following the introduction of US spot currency ETFs. These ETFs have significantly influenced recent price trends.
In total, Bitcoin ETFs reached a new daily record on February 28, 2024, with more than $6 billion changing hands, according to Bloomberg Intelligence ETF Research Analyst James Seyfart. Seyphart noted that the increased volume exceeded the previous daily record for volume set on the day these products were launched.
To sum up, the demand from Bitcoin spot funds, which has increased demand to unprecedented levels, and the expected halving event next April, which will reduce supply, as well as the possibility of a rate cut by the US Federal Reserve next June, thus raising speculative appetite, all of which may lead Bitcoin to… New highs.
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