Bitcoin's Race to $100,000: The Impact of Limited Supply and ETF Dynamics

Bitcoin's inherently limited supply of 21 million units has always been a fundamental aspect of its appeal, acting as a magnet for investors worldwide.

by Faruk Imamovic
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Bitcoin's Race to $100,000: The Impact of Limited Supply and ETF Dynamics
© Getty Images/Anthony Kwan

Bitcoin's inherently limited supply of 21 million units has always been a fundamental aspect of its appeal, acting as a magnet for investors worldwide. With more than $25 billion invested in spot exchange-traded funds (ETFs) since the start of the year, the allure of this digital currency has only intensified. The surge in demand coincides with a pivotal time for Bitcoin, as its available supply dwindles—more than 19 million units have already been mined. Furthermore, data from Glassnode reveals that the percentage of Bitcoin available for trading on exchanges has dropped to its lowest level in over six years.

Adding to the urgency is the impending "halving" event scheduled for April 16, 2024, which will see the daily issuance of new bitcoins cut from 900 to 450. Such halvings, which occur every four years, are anticipated events that have historically triggered price increases. This particular reduction could potentially propel Bitcoin's value above $100,000 by the end of 2024.

ETFs and Market Dynamics

The recent approval by the Securities and Exchange Commission (SEC) of several spot-based Bitcoin ETFs marks a significant milestone. It took over a decade for the first application for a spot-based Bitcoin ETF to gain approval, highlighting the pent-up demand. Since their launch, these products, including offerings from major firms such as BlackRock, Fidelity, and Invesco, have amassed $35 billion in assets under management—most of which represents new inflows.

The impact of these ETFs is profound, as evidenced by data from BitMEX Research. Between January 11 and April 3, the daily net inflows into these ETFs totaled 216,469 units of Bitcoin. This figure drastically outpaces the amount of Bitcoin mined during the same period, illustrating a significant imbalance between supply and demand.

Bitcoin
Bitcoin© Getty Images/Anthony Kwan
 

This discrepancy is set to widen further once the halving reduces the rate of new Bitcoin creation. The daily demand from these ETFs is projected to be 5.7 times the post-halving daily output of new bitcoins, assuming current demand levels persist. If these ETFs continue to see an increase in inflows—which is likely as more platforms begin to offer them—the demand could surge even higher.

Bitcoin's Shrinking Supply on Exchanges

The decrease in Bitcoin's availability on exchanges is another critical factor to consider. As of now, only 11.75% of Bitcoin's total supply is available for trading—the lowest proportion since December 2017. This decline in available supply is particularly notable because it represents a shift in behavior among Bitcoin holders. Unlike in previous cycles, current holders are choosing not to sell, potentially in anticipation of higher prices post-halving.

Brett Munster of Blockforce Capital points out that this is the first full cycle where the supply of Bitcoin on exchanges is not increasing. He suggests that this trend, combined with the reduction in new Bitcoin issuance, could exacerbate the supply-demand imbalance, pushing prices upward.

Investor Sentiment and Market Forecasts

Despite the compelling data, not all analysts believe that the current high inflows into Bitcoin ETFs are due to investors trying to front-run the expected price increases post-halving. Many investors may simply be drawn to the relative ease of investing in Bitcoin through ETFs and the growing acceptance of Bitcoin by regulatory bodies.

Nevertheless, if historical patterns hold, Bitcoin may experience a brief period of adjustment immediately after the halving, followed by a significant bull market, potentially beginning in late 2024. This pattern has been observed in all previous halving events and could well repeat.

Investment opportunities in Bitcoin are abundant, ranging from direct purchases on exchanges to ETFs that blend exposure to Bitcoin's price movements with income from options strategies. For those looking at company stocks, MicroStrategy and Coinbase provide indirect exposure to Bitcoin's performance, with both companies showing substantial growth in 2024.

Strategies for Investing in Bitcoin's Potential Upside

For those considering investing in Bitcoin, understanding the available avenues is crucial. The simplest way to invest is by purchasing Bitcoin directly through cryptocurrency exchanges, brokerage firms like Robinhood or Fidelity, and even payment platforms like PayPal and Block. This direct approach offers the most straightforward exposure to any potential price increases.

Another intriguing option is investing in Bitcoin ETFs. These funds have gained significant popularity due to their ease of access and the perception of legitimacy they provide as regulated products. For example, the Roundhill Bitcoin Covered Call Strategy ETF (YBTC) allows investors to benefit from both the potential appreciation of Bitcoin and income generated from selling call options on the holdings. These call options provide additional income streams while still allowing for participation in Bitcoin’s price movements.

Investing in companies that hold significant amounts of Bitcoin or are heavily invested in the cryptocurrency ecosystem offers another avenue. MicroStrategy, for instance, has become a major player in the Bitcoin market, owning approximately 205,000 units of Bitcoin. Its stock has seen substantial gains, reflecting the robust performance of its Bitcoin investments. Similarly, investing in Coinbase provides exposure to the broader cryptocurrency market beyond just Bitcoin, as it offers a platform for trading a variety of digital assets.

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