Last year was Bitcoin’s big break after a disastrous 2022. The asset rallied more than 150% while outperforming most asset classes. Institutional interest picked up, and so did media attention. 2024 started strongly after the approval for physically backed exchange-traded funds (ETFs) in the US, which granted investors much-needed accessibility. This year’s rally has been triggered by three fundamental catalysts: an overwhelming rise in demand, a constrained supply schedule, and improving US dollar liquidity on top of expectations of a looser US monetary policy.
A low token liquidity backdrop further fueled the rally, and with the upcoming halving, expected on April 19, this is unlikely to improve. Demand has risen as convictions concerning the asset’s role as a store of value have evolved, while some investors believe it can play a role within a portfolio context. The availability of the new ETFs has undoubtedly helped in that regard, even though Bitcoin’s behaviour is still closest to that of risk-on assets.
The reason for our rating change in July 2023 and the related recommendation to buy Bitcoin was simple: a supply squeeze was in the making. There were not enough tokens held by short-term holders to counter the growing demand we envisioned. As of today, the picture has not changed much, long-term holders continue to grow relative to the short-term holder cohort, with almost 80% of the token supply being illiquid for over six months. All-in-all, ETFs have driven demand growth. The need for spot ETFs is very straightforward: the asset has found its way into a portfolio context, either as a potential store of value or as an alternative asset with return enhancement and diversification potential.
The halving event is anticipated to generate significant interest in Bitcoin, likely influencing its market dynamics amidst a bullish market mood. However, the overall trajectory will also be contingent on the new developments in blockchain technology, the regulatory environment, and adoption trends in both the private and public sectors. It is a dynamic environment where adaptability and forward-thinking are key. Bitcoin’s market dynamics are unlikely to stagnate; proxy investing as we know it will hopefully change, while the market’s completeness will provide investors with multiple ways of obtaining Bitcoin exposure. Looking back, investors’ perceptions of portfolio allocations to Bitcoin have indeed shifted, and some of the largest asset managers in the world are referring to the asset as a flight to quality. A stronger-than-expected demand moves markets amid improving dollar-liquidity conditions and a constrained supply schedule.
Token-supply illiquidity has broadened, leading to heightened implicit costs in centralised exchanges, easily evidenced by the broader gaps between bid and ask spreads and the increasing slippage. Currently, these exchanges hold around 8% of the total circulating supply, a ratio that has been consistently decreasing. The low-liquidity backdrop stems from the fact that Bitcoin holders have accumulated their tokens, with almost 80% of the supply illiquid for the past six months and 70% for a year. On another note, the growing token demand that the ETFs’ authorised participants require to fulfil the issuance of new shares also impacts supply and puts pressure on prices. Supply constraints are likely to favour long-biased investors, as rising demand has only been draining further market token liquidity. Rising prices and decreasing energy costs have been improving miners’ profitability schedules. Higher profitability translates into fewer outflows of newly minted Bitcoins into exchanges, reducing the need to sell the actual tokens.
As Bitcoin allocations find their way into discretionary mandates, positions will likely become stickier, only traded when the mandates are rebalanced bi-annually or quarterly. The decreasing costs of holding these wrappers and the low levels of differentiation across products will only add to the matter. As of today, weekly issuance sits at around 6,300 tokens, and average weekly demand from the 11 US ETFs alone stood above 30,000 tokens during March; thus, demand outpaced supply growth by a factor of five. Supply constraints are only likely to increase, and the halving will play a fundamental role. Furthermore, should token demand remain relatively consistent, prices will see some further upside pressure.
If the token liquidity conditions continue to worsen, volatility is set to persist. The fact that Bitcoin continued to rally despite a scaling-back of expectations of a rapid reversal of US monetary policy underpins the soundness of the fundamental backdrop. While US interest rates have peaked, we do not believe a rapid reversal is necessary, considering the remarkable resilience of the US economy. That said, improving US-dollar liquidity and potentially lower interest rates should nevertheless be regarded as a supportive factor for Bitcoin. Short-term volatility is set to persist as long as geopolitical tensions remain at the centre of attention, fundamentals are strong, and short-term setbacks could be seen as potential entry points. Prices will likely see short-term downward pressure should the conflicts escalate further.
Bitcoin investors are set to benefit from the upcoming halving and its effects on the ongoing supply squeeze, which is only likely to exacerbate. Even though the positive fundamentals are primarily priced in, we believe there is a further upside, and Bitcoin should eventually start flirting with new highs.
