NEW YORK - At the heart of the rally that is pushing Bitcoin towards a record high is a simple tenet of economics: Supply and demand.
The surge in demand for the cryptocurrency that is resulting from new exchange-traded funds (ETFs) is vastly outstripping the amount of Bitcoin that long-time holders are willing to sell.
That is what lit the match that has set the crypto market on fire, with fuel being added from traders chasing the upward momentum, covering short positions and loading up on leveraged bets that the bull run will continue.
A wild 24 hours for the cryptocurrency market saw Bitcoin jump as much as 13 per cent on Feb 28 to US$63,968 – its first trip above US$60,000 since November 2021 – before paring some of the gains to trade at US$62,088 as at 1.34pm on Feb 29 in Singapore. Along the way, leading US digital-asset exchange Coinbase suffered outages as traffic surged before eventually restoring services.
Bitcoin has jumped more than 40 per cent already in 2024 atop the successful debut of the US ETFs, which directly hold the token. The batch of funds from the likes of BlackRock and Fidelity Investments went live on Jan 11, wooing net inflows of almost US$7 billion (S$9.4 billion) to date.
At current levels, the token is in sight of its pandemic-era record of US$68,991.85, a bullish outpost amid wider caution in global markets due to pared back expectations for looser monetary policy.
An upcoming reduction in Bitcoin’s supply growth, known as the halving, is adding to the optimistic sentiment.
“Optimism around Bitcoin is being driven by a few factors working together: the spot BTC ETF inflows in the US, the upcoming reduction of new Bitcoin issuance known as the halving, and overall renewed optimism around the crypto asset class as a whole,” said Kraken Australia digital asset exchange managing director Jonathon Miller.
Bitcoin has more than tripled in value since the start of 2023, climbing back from a 64 per cent plunge in 2022, in a remarkable comeback from a series of crypto industry scandals and bankruptcies that had raised questions about crypto’s viability.
Bitcoin has outperformed traditional assets like stocks and gold in 2024, providing a locus of volatility for traders seeking opportunities.
The inflows into Bitcoin ETFs have prompted industry watchers to warn of a supply squeeze. Some 80 per cent of Bitcoin’s supply has not changed hands in the past six months. The nine new spot ETFs have more than 300,000 Bitcoin, or seven times the amount of new coins mined since Jan 11.
After the halving, expected in late April, the number of new coins mined daily will decline to 450 from 900 currently. If demand stays constant, advocates are predicting that the price has room to rally.
“We are starting to see a pretty clear Fomo (fear of missing out) kind of rally,” said Mr Zaheer Ebtikar, founder of crypto fund Split Capital. “More and more people are just convinced to buy.”
The speed of the advance has some observers warning of the boom and bust cycles that have become emblematic of crypto. For instance, Bitcoin slid below US$15,500 about a year after achieving its record high in November 2021.
“This move has been very sharp, leverage is very high at the moment, as implied by derivatives basis and funding rates, so I would not be surprised by a sharp correction” or 20 per cent or more, said Mr Jaime Baeza, founder at crypto hedge fund AnB Investments. “Nonetheless, I would not be shorting into this rally while it continues to move at this pace.” BLOOMBERG
