In late 2023 and early 2024, Bitcoin experienced a significant surge in price, reaching over $64,000. This surge was driven by a combination of factors, including increased institutional demand and the approval of spot Bitcoin ETFs. This article will examine how institutional demand and production rate affect the supply shock in Bitcoin.
Institutional Demand and Its Impact:
Recently, institutional investors such as BlackRock, Fidelity, 21Shares, and MicroStrategy have made substantial investments in Bitcoin. BlackRock's ownership of 151,536 BTC and the total of 767,877 BTC in Bitcoin ETFs highlight the extent of institutional interest. These investments have increased confidence and legitimacy in Bitcoin, attracting more investors and increasing market volume. The interest in ETFs has exceeded expectations, and demand has been rising steadily.
Motivations of Institutional Investors:
Inflation Protection: Bitcoin's limited supply and inflation resistance make it an attractive asset for inflation protection. Portfolio Diversification: Bitcoin's low correlation with traditional asset classes helps investors diversify their portfolios. Long-Term Growth Potential: Bitcoin's long-term growth potential attracts many institutional investors. It is important to note that these institutional firms' investment motivations should not be viewed solely from a corporate perspective. They manage billions of dollars and work with millions of clients. Therefore, the purchases and volume transactions made by these institutional firms do not solely represent the companies themselves, but also encompass the individual transactions of their clients. Through spot Bitcoin ETFs, clients can access Bitcoin through these companies.
While we knew that firms held Bitcoin before ETFs, ETFs have made the process much more stable and accessible.
Impact of Spot Bitcoin ETFs:
In late 2023, the first spot Bitcoin ETFs were approved in the US. These ETFs allow investors to invest in Bitcoin directly on exchanges, further increasing accessibility and volume. On February 28, 2024, a total of 11,211 BTC was added to Bitcoin ETFs in a single day, a concrete indication of the interest in these ETFs and the growing demand for Bitcoin.
Advantages of Spot Bitcoin ETFs:
Easy Access: Allows investors to invest directly in Bitcoin through regulated institutional firms. More Investors: Provides an option for investors who want to invest in Bitcoin but do not want to use cryptocurrency exchanges. Risk and Management: Investors do not have to deal with storing Bitcoin and the complexities of using new platforms and unfamiliar technologies.
Causes of the Supply Shock:
Bitcoin's daily production rate is 900 BTC on average. This production rate has become unable to keep up with the increasing demand. As seen on February 28, 2024, daily purchases of 11,211 BTC can lead to a supply shock, causing the price to rise.
Halving Effect:
The halving, which will occur in mid-2024, will further reduce the supply of Bitcoin by cutting the production rate in half. This could exacerbate the current supply shock, contributing to an even higher price increase.
Effects of the Supply Shock:
Price Increase: The most obvious effect of the supply shock is an increase in the price of Bitcoin. Increased demand and fixed supply lead to higher prices. Increased Volatility: Supply shocks can also lead to increased volatility (fluctuations) in the Bitcoin price. Sudden price fluctuations can pose risks for investors. Recent significant volatility has led to millions of dollars in liquidations in the market. Decrease in Miner Profitability: Halving can reduce miner profitability and affect mining activities. A decrease in mining profitability can lead to a decrease in hashrate.
Investor Behavior:
Supply shocks can also affect investor behavior. Price increases can attract investors and bring more investors into the market. However, increased volatility can deter some investors.
Long-Term Effects:
It is difficult to say definitively what impact supply shocks will have on the long-term price of Bitcoin. Experts believe that supply shocks can cause short-term price fluctuations but can increase Bitcoin's value in the long term.
Risks:
Supply shocks can pose a number of risks to investors. Price fluctuations and volatility can cause investors to lose money. Additionally, supply shocks can make the Bitcoin market more vulnerable to manipulation.
Conclusion:
The imbalance between institutional demand and production rate is causing a supply shock in Bitcoin, leading to higher prices. This situation is expected to become more pronounced with the halving. Supply shocks can cause price fluctuations and volatility in Bitcoin. Investors should consider these risks before investing.**
