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1 reason for the new bitcoin craze: the “Simply not enough” offer.
There is a fundamental law of economics at play in the new market craze surrounding bitcoin (BTC-USD): supply and demand.
On average, more bitcoins are purchased every day than new coins are created.
One of the main reasons for this imbalance is the appetite created by a number of US-listed bitcoin exchange-traded funds approved by the Securities and Exchange Commission in January and have attracted large amounts of money from new investors in the past month.
The price of bitcoin is approaching its all-time high in 2021. (Dado Ruvic/REUTERS/Illustration/File Photo) (Reuters / Reuters)
Since the beginning of February, these products have purchased an average of 3,500-4,300 coins per day, according to three analysts working for cryptocurrency managers.
This is considerably more than the 900 coins created each day by the Bitcoin network over the same period.
“There simply isn’t enough bitcoin to meet all the new demand, so the natural dynamics of supply and demand are pushing prices higher,” said Zach Pandl, head of research at Grayscale Investments.
Bitcoin surpassed $63,000 on Thursday, bringing it within striking distance of its all-time high of nearly $69,000 reached in November 2021. It was changing hands at around $62,220 early Friday.
It ended February with gains of 44%, its best monthly performance since December 2020.
A “halving”
There may be further supply issues due to a “halving” expected in two months.
When it was created in 2009 by pseudonymous software programmer Satoshi Nakamoto, bitcoin was programmed with a fixed supply schedule that was halved every four years.
After the next denomination, the so-called halving, the daily supply of new coins will be 450 instead of 900.
This could push prices higher.
“We are potentially in the best position right here,” Mark Connors, head of research for crypto asset manager 3iQ, told Yahoo Finance. “We cannot produce more bitcoin to meet demand.”
This year, Connor’s firm set its mid-to-high price target for Bitcoin at between $160,000 and $180,000. Next year, he predicts an eye-popping goal of between $350,000 and $450,000 per coin.
Another money manager, VanEck, set an $80,000 2024 price target for bitcoin last quarter.
“These estimates are certainly a little dated now,” said Matthew Sigel, head of digital asset research for VanEck.
“Purely speculative question”
There are certainly other factors at play in the current supply crisis beyond demand for ETFs.
One example: According to blockchain analytics platform Arkham Intelligence, the US government currently holds 215,000 BTC, a stash that includes seizures in various seizures, such as the 2016 hack of cryptocurrency exchange Bitfinex.
The story continues
The fact that they are currently simply being held back and not sold is limiting supply. But that could change when the government needs to distribute some of the sum to victims, which could mean selling it.
Another large holder and acquirer at the moment is MicroStrategy (MSTR), which announced on Monday morning that it had acquired an additional 3,000 BTC. This brought his total investment to 193,000 BTC, which was valued at over $11.8 billion on Wednesday.
As asset prices rise, many institutional buyers will have to take profits to maintain the balance of their portfolios, Sigel said with VanEck. This could also change the imbalance between supply and demand.
There are also certainly less fundamental and more psychological factors driving this new rally, including the fear of missing out.
“It’s certainly a representation of risk appetite,” Sam Stovall, chief investment strategist for CFRA Research, told Yahoo Finance Live.
ETFs have made holding bitcoin “much easier, particularly for investors who are not tech-savvy,” said Eric Rosengren, former president and CEO of the Federal Reserve Bank of Boston.
“In reality it doesn’t change the fundamental and underlying fact [bitcoin] It doesn’t generate any returns, so it’s pure speculative demand.”
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrencies and other areas of finance.
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