21metrics weekly: Supply and Demand Shock
Bitcoin Reaches a New ATH
The cryptocurrency market has been showcasing exceptionally strong performance this week, momentarily propelling bitcoin to a 20 percent price ascent. Uplifted by the spot ETF demand, bitcoin is leading the market and its dominance in relation to other cryptocurrencies has grown by 23 percent within 12 months.
With only 46 days to its halving, bitcoin’s scarcity is about to increase, as the event literally halves bitcoin’s block reward from 6,25 to 3,125. Bitcoin is approaching a similar UTXO shift as in 2021, when the 6M-12M band climbed above the 12M-18M band.
Despite the technical correction on Wednesday, Coinbase Research’s David Duong sees escalating demand for bitcoin-related ETFs. Duong also mentions the approaching halving event as a supply-reducing factor.
"Looking ahead, we still think significant demand remains to be unlocked as wirehouses do their due diligence to allow their clients to buy these products, while the supply effects from the halving in April could drive the technical move for bitcoin higher." - David Duong
Sources: Timo Oinonen, CryptoQuant
Trailing George Soros' reflexivity theory, bitcoin can be considered a reflexive asset. Bitcoin creates positive feedback loops between expectations and economic fundamentals that can cause price trends to substantially deviate from equilibrium prices.
The current epoch, fueled by a repertoire of new spot ETFs, transforms into a reinforcing cycle that propels the spot into new heights. 2024 and 2025 will be characterized by supply shock (halving) and demand shock (institutional buyers). The organic retail FOMO is expected to kick in after the psychological 100 000 USD level.
The Demand Shock
The inception of eleven (11) new spot bitcoin ETFs in January was a paradigm shift to the digital asset market, as they’re creating a huge wave of newlyfound demand. Despite the sluggish start, the new ETFs have amassed 346 445 bitcoins since January, excluding the Grayscale’s Bitcoin Trust (GBTC).
Spot ETF Holdings (Excl. Grayscale): 346 445 BTC
Spot ETF Holdings: 767 122 BTC
A significant share of spot ETF demand revolves around BlackRock’s IBIT (164 501 BTC) and Fidelity’s FBTC (104 916 BTC). Both of these funds carry a management fee of 0,25 percent, which is only a fraction of Grayscale’s 1,5% fee.
Grayscale's GBTC, the former favourite of hedge funds, probably needs to decrease its managamement fee, that currently is sixfold compared to its closest rivals.
Source: 21metrics
The new ETFs are increasingly cannibalizing gold-related financial products as investors seem to prefer the “digital gold” alternative. Compared to GLD’s launch in 2005, the net flows of eleven spot bitcoin ETFs are in their own class.
Source: Citigroup
MicroStrategy’s Balance Sheet Now Holds 193 000 Bitcoins
MicroStrategy (MSTR), led by Michael Saylor, announced earlier this week that it has increased its balance sheet by 3000 new bitcoins. These recent acquisitions expand the company's balance sheet to 193 000 units.
In the rapidly growing spot ETF market, BlackRock's iShares Bitcoin Trust (IBIT) holds 164 501 bitcoins, approaching MicroStrategy's level in the upcoming weeks. MicroStrategy, known as the unofficial ETF fund for Bitcoin, may need to defend its position amid the crossfire of new investment products.
MicroStrategy employs a dollar-cost averaging (DCA) strategy in its purchases, but cyclically weights its buying program. When spot prices sharply declined in 2022, the company's purchases were modest at 8109 bitcoins, while in 2023, acquisitions rose to 56 650 units. On an annual basis, the growth of MSTR's buying program from 2022 to 2023 was an impressive 599 percent.
Source: 21metrics
Previously, individuals like Preston Pysh have viewed MicroStrategy's buying program as a speculative attack against the dollar. The company's loan arrangements ultimately rely on unlimited fiat currency, which is borrowed for the purchase program of a limited supply asset class (i.e., bitcoin). Scaled up, this model implies the weakening of the dollar as bitcoin continuously strengthens.
Pysh has likened the buying program to George Soros's famous attack against the Bank of England (BoE), where he shorted the pound (GBP) by nearly a billion units. The BoE central bank was believed to be close to collapse at that time.
How to Trade the Upcoming Halving?
The entire value proposition of the Bitcoin network is based on the principle of scarcity, and the halving event increases the scarcity of the cryptocurrency by gradually reducing its supply.
In addition to the halving theory, investors are interested in halving-related practical applications. Many investors are now pondering how to trade the halving and benefit from it.
The simplest answer would be to consider halving as part of a buy-and-hold strategy when the spot price of bitcoin is relatively affordable. The end of Bitcoin's distribution cycle at the turn of the year represented a multi-year price bottom and the beginning of a new accumulation cycle. The intersection of these cycles provides a good area for accumulating bitcoin while keeping an eye on the 2024 halving.
Another approach is the trading rule recommended by PlanB, the creator of the Stock-to-Flow (S2F) model. PlanB advises investors to engage in position trading, where bitcoin purchases are made six months before the halving event. Simultaneously, PlanB suggests selling the position 18 months after the halving. According to PlanB, this strategy offers an optimal risk-reward ratio.
According to Anthony Pompliano, Bitcoin is an asymmetric investment with upside potential that greatly outweighs its risks. Bitcoin still is an exceptionally attractive asset for investors with a long-term perspective.
