The surge in Bitcoin (BTC-USD) mania can be attributed to a fundamental principle of economics: the law of supply and demand. More bitcoins are being purchased daily than are being newly minted, creating an imbalance in the market.
A significant factor contributing to this phenomenon is the introduction of several US-listed bitcoin exchange-traded funds (ETFs) approved by the Securities and Exchange Commission in January. These ETFs have attracted substantial investor capital over the past month, with an average daily purchase of 3,500-4,300 coins since February, surpassing the daily creation rate of 900 coins by the Bitcoin network during the same period.
Zach Pandl, research head at Grayscale Investments, explains, “There is simply not enough bitcoin to accommodate all the new demand, and so natural supply/demand dynamics are driving prices higher.”
Bitcoin surged past $63,000 recently, nearing its all-time high of nearly $69,000 reached in November 2021. It is poised to end February with a remarkable 42% gain, its best monthly performance since December 2020.
Supply Concerns Ahead
Further exacerbating supply constraints is an upcoming “halving” event scheduled in two months. Bitcoin’s supply schedule, programmed to halve every four years since its inception in 2009, will reduce the daily production of new coins to 450 from the current 900 after the next halving. This impending reduction in supply could further propel prices upwards.
Mark Connors, head of research for crypto asset manager 3iQ, sees this as an opportune moment, stating, “We can’t produce more bitcoin to meet demand.” 3iQ has set ambitious price targets for bitcoin this year, ranging from $160,000 to $180,000, and even more staggering projections for the following year.
Matthew Sigel, head of digital asset research for VanEck, acknowledges that previous price estimates may now be outdated, as the market dynamics continue to evolve.
Beyond ETF Demand
While ETF demand is a significant driver of the current supply crunch, other factors are also at play. The US government holds a substantial amount of bitcoin, primarily acquired through various seizures, constraining the available supply. Additionally, institutional buyers like MicroStrategy continue to accumulate large amounts of bitcoin, though profit-taking by these investors could potentially alter the supply-demand dynamics.
Psychological factors, such as the fear of missing out, also contribute to the current rally. Eric Rosengren, former president and CEO of the Federal Reserve Bank of Boston, highlights that while ETFs make bitcoin more accessible, its lack of inherent value means its demand is largely speculative.
