At the core of the upward momentum propelling Bitcoin towards an all-time high lies a fundamental economic principle: the interplay of supply and demand.
The surge in demand for Bitcoin, spurred by the introduction of new exchange-traded funds, significantly surpasses the rate of new tokens entering circulation through the mining process, as well as the quantity of Bitcoin available for sale by long-term holders. This fundamental disequilibrium has ignited the cryptocurrency market, with traders amplifying the momentum by increasingly engaging in leveraged positions, betting on the continuation of the upward trajectory.
On Wednesday, Bitcoin breached the $60,000 threshold for the first time in over two years, marking a staggering 40 percent surge since the beginning of the year. This surge has been largely catalyzed by the successful launch of U.S. exchange-traded funds, which commenced trading on January 11th and have garnered over $6 billion in investments. Notably, Bitcoin last attained the $60,000 mark in November 2021, following an all-time high of nearly $69,000 earlier that same month.
Moreover, an imminent reduction in Bitcoin’s supply growth, known as the halving, has contributed to the prevailing optimism among investors. This sentiment has sustained a prolonged rally, concurrently fostering speculative interest in alternative tokens such as Ether and Dogecoin.
Zaheer Ebtikar, founder of crypto fund Split Capital, observed, “We are witnessing a clear ‘fear of missing out’ (FOMO) rally. A growing number of individuals are increasingly convinced to invest.”
It is pertinent to acknowledge that halvings previously exerted a considerable influence on Bitcoin prices, given that miners wielded substantial control over the issuance of new tokens. However, their influence has diminished significantly as the majority of tokens have already been mined and are actively traded in the market.
On Wednesday, Bitcoin surged by as much as 13 percent to reach $63,968.23 before retracing gains and briefly dipping below the $60,000 mark. Concurrently, Coinbase Global Inc. reported instances of users encountering difficulties in executing transactions, albeit reassuring customers that their assets remain secure.
The relentless rally positions Bitcoin for its most substantial monthly gain since December 2020, when the digital asset surged by 50 percent to approximately $9,600.
Since the onset of last year, Bitcoin’s value has more than tripled, rebounding from a 64 percent downturn in 2022. This remarkable resurgence follows a series of scandals and bankruptcies within the crypto industry, which had previously cast doubt on the viability of digital assets.
Remarkably, digital tokens are experiencing notable appreciation despite investors moderating their expectations for looser monetary policies, as evidenced by the uptick in U.S. Treasury yields. In 2024, Bitcoin has outpaced traditional assets like stocks and gold.
Michael Safai, co-founder at quantitative trading firm Dexterity Capital, remarked, “This reversal is particularly impressive given central banks’ indications of maintaining high-interest rates for the foreseeable future, challenging the notion that the next crypto bull run would hinge on declining interest rates.”
The substantial influx of capital into Bitcoin ETFs has prompted industry observers to caution against an impending supply crunch, as the pace of new coin issuance fails to match the escalating demand. Approximately 80 percent of Bitcoin’s supply has remained dormant for the past six months, potentially exacerbating the supply shortage and exerting upward pressure on prices, analysts contend.
The introduction of nine new spot ETFs has resulted in an accumulation of over 300,000 Bitcoin, equivalent to seven times the volume of new coins mined since January 11th. Following the halving, anticipated in late April, the daily issuance of new coins will decline from 900 to 450. Should demand persist at current levels amidst a halved supply, proponents anticipate further upward momentum in prices.
Dan Slavin, founder of Chainview Capital, a crypto hedge fund, remarked, “The confluence of these factors creates a significant imbalance between supply and demand. With demand outstripping supply, price appreciation ensues. Given Bitcoin’s volatility, price appreciation transcends modest gains, leading to substantial increases.”
However, the rapid pace of the rally has prompted some observers to caution against the susceptibility of investors to the boom-and-bust cycles synonymous with the cryptocurrency market.
Jaime Baeza, founder at crypto hedge fund AnB Investments, cautioned, “This rally has been swift, accompanied by elevated leverage, as evidenced by derivatives metrics and funding rates. Therefore, a substantial correction of 20 percent or more would not be surprising. Nonetheless, I would refrain from shorting into this rally while it maintains its current pace.”
