With the successful listing of the Bitcoin spot ETF and the upcoming halving event in April, there are factors contributing to the continuous rise in Bitcoin’s price on both the supply and demand sides. This article is sourced from AC Capital and compiled and written by PANews.
Summary:
2024 was a crazy year for the cryptocurrency market, with Bitcoin being the wildest asset class. Over the past month, Bitcoin has seen an increase of over 50%. What mechanisms are behind this crazy market performance? Can the madness continue? Let’s delve into it.
The price increase of any asset is inseparable from a decrease in supply and an increase in demand. Let’s break it down into the supply side and the demand side and analyze them separately.
As Bitcoin continues to halve, the impact of the supply side on Bitcoin’s price continues to weaken, but we still need to observe potential selling pressure.
On the supply side, the consensus is that there will be less than 2 million newly generated BTC. Furthermore, the issuance rate will experience another halving. The added selling pressure will further decrease after the halving. Looking at the miners’ accounts, they have been holding more than 18 million BTC for a long time. Based on this trend, miners do not have the tendency to sell.
On the other hand, the number of BTC held by long-term holders continues to grow and is currently around 14.9 million. The actual circulating supply of BTC is extremely limited, with a market value of less than 350 billion. This explains why a daily average of 500 million USD in continuous buying has led to the crazy rise of Bitcoin.
The increase in demand comes from multiple aspects:
– Liquidity brought by ETFs
– Value growth of assets held by the wealthy
– Financial business being more attractive than short-term investments
– Funds cannot afford to miss Bitcoin
ETF is the scarcity of Bitcoin in this round that cannot be replicated. Through SEC’s approval of Bitcoin ETF, Bitcoin has gained access to the traditional financial market. Compliant funds can finally flow into Bitcoin, and traditional financial capital can only flow into Bitcoin in the crypto world.
Bitcoin’s scarcity due to monetary tightening is an asset structure that is easy to create a speculative bubble and is prone to FOMO. As long as funds continue to buy Bitcoin, its price will continue to rise. Funds holding Bitcoin will have higher returns, allowing them to buy more Bitcoin. Funds that do not buy Bitcoin will face performance pressure and even face capital outflows. Wall Street has been playing this game in the real estate market for decades.
Bitcoin’s properties are more suitable for this Ponzi game. In the past month, the average net daily purchase of less than $500 million has led to a market increase of over 50%. Such purchases are considered insignificant in the traditional financial market.
ETF has also increased the value of Bitcoin in terms of liquidity. The global scale of traditional finance, including real estate, is expected to reach $560 trillion in 2023. This proves that the current liquidity of traditional finance is sufficient to support such a scale of financial assets. We know that Bitcoin’s liquidity is not comparable to that of traditional financial assets. By accepting Bitcoin, traditional finance can create liquidity that allows Bitcoin to have a higher valuation. Please note that this compliant liquidity can only flow into Bitcoin and not other digital assets. Bitcoin no longer shares liquidity pools with other digital assets.
Assets with higher liquidity have higher investment value. Only assets that can be instantly realized in value can bear greater wealth. This leads to the next point.
Based on my small-scale market field survey, I found that billionaires in the crypto market often hold a large proportion of Bitcoin during bull markets, while people in the middle class or below usually hold less than a quarter of their portfolios in Bitcoin. Currently, Bitcoin’s dominance is 54.8%. If the proportion of Bitcoin holdings among people in the same circle is much lower than this, then who will hold Bitcoin?
The answer is obvious: Bitcoin is in the hands of the wealthy and institutions.
This leads to a phenomenon called the Matthew Effect – assets held by the wealthy will continue to rise in value, while assets held by the general public will continue to decline. If there is no government intervention, the market economy will inevitably exhibit the Matthew Effect. The rich get richer, and the poor get poorer. This is theoretically based. Not only because the rich may be inherently smarter and more capable, but also because they naturally have many resources. Smart people, useful resources, and information naturally revolve around these wealthy individuals for cooperation. As long as a person’s wealth is not obtained by luck, it can generate a multiplier effect and become richer and richer. Therefore, things that fit the aesthetics and preferences of the wealthy will inevitably become more expensive, while things that fit the aesthetics and preferences of the poor will become cheaper.
In the crypto market, the wealthy and institutions use alternative coins as a means to empty the pockets of ordinary people, while using mainstream tokens with high liquidity characteristics as storage tools. Wealth flows from ordinary people to altcoins and is harvested by the wealthy or institutions, and then flows into mainstream coins like Bitcoin. When Bitcoin’s liquidity improves, it becomes even more attractive to the wealthy and institutions.
The price of Bitcoin is not of much significance. The key is whether it can capture a market share in the Bitcoin financial market.
After the SEC approved Bitcoin’s spot ETF, it triggered competition in multiple aspects of the market. Institutions like BlackRock and Goldman Sachs are competing for the leadership position in ETFs in the United States. In the global market, financial centers including Singapore, Switzerland, and Hong Kong are following suit. Institutional selling may happen, but whether a small amount of accumulated Bitcoin can be brought back to the market in an international environment without creating a liquidity shortage is unknown.
Furthermore, without BTC spot backed by ETFs, the issuing institutions not only lose transaction fees but also lose the right to price BTC. The corresponding financial market also loses BTC, the pioneer of digital gold and the cornerstone of future finance. The market for BTC spot derivatives will also disappear. This is a strategic failure for any country and financial market.
Therefore, I believe it is difficult for global traditional financial capital to conspire to sell off. Instead, it will create FOMO in the process of continuously raising funds.
Bitcoin is the “scripture” of Wall Street.
For the term “scripture,” investors in the Chinese-speaking region may have a better understanding. It refers to low-cost, high-odds assets that, with a small investment, can significantly increase the return on investment and prevent the portfolio from facing catastrophic risks. Bitcoin’s current valuation is still negligible in the traditional financial market. Moreover, Bitcoin’s correlation with mainstream assets is not significant (although it is not as negatively correlated as before). So, isn’t it logical for mainstream funds to hold some Bitcoin?
What’s more, if Bitcoin becomes the highest-yielding asset in the mainstream financial market in 2024, how will fund managers explain it to their LPs? Conversely, if fund managers hold 1% or 2% of Bitcoin, even if they don’t like it or suffer losses, it won’t significantly affect their performance due to excessive Bitcoin risk, and it will be easier to report to investors.
BTC’s assets price has a limited correlation with mainstream assets.
Bitcoin is the natural rat warehouse for Wall Street fund managers.
Just as discussed earlier, why do Wall Street fund managers reluctantly buy Bitcoin? Now let’s talk about why they willingly buy Bitcoin.
We know that Bitcoin is naturally semi-anonymous on the Internet. I believe the SEC cannot penetrate fund managers’ Bitcoin spot accounts like they can with securities. Yes, Coinbase, Binance, and other exchanges require KYC for deposits, withdrawals, and OTC transactions. However, we know that offline OTC transactions can still occur. Regulatory agencies do not have sufficient means to supervise financial professionals’ spot holdings.
Based on the previous arguments, fund managers can write detailed reports justifying their Bitcoin investments. Since Bitcoin itself lacks liquidity, a small amount of capital can move its price. As fund managers, in the presence of sufficient objective reasons, what factors would prevent them from using the public’s money to lift themselves up?
Bootstrap of project traffic
The bootstrap of traffic is a unique phenomenon in the crypto market, and Bitcoin has benefited from it in the long term.
Bitcoin’s traffic bootstrap refers to other projects needing to build Bitcoin’s image in order to attract Bitcoin’s traffic, and ultimately inject the traffic they generate back into Bitcoin.
Recalling the issuance of all altcoins, they always mention Bitcoin’s legend and the mystery and greatness of Satoshi Nakamoto. They also talk about how they want to become the second Bitcoin. Bitcoin does not need operations but is passively operated and branded by projects. Currently, there are dozens of Layer 2 solutions on Bitcoin and millions of projects trying to borrow traffic from Bitcoin to collectively promote massive adoption. This year’s traffic bootstrap for Bitcoin will be stronger than ever before.
In conclusion, compared to last year, the biggest variable in the market is the approval of Bitcoin ETFs. Through analysis, we find that all factors are pumping Bitcoin’s price. Supply is shrinking, and demand is increasing.
Based on the above, I believe that Bitcoin is the biggest alpha in 2024.