The following is a guest post from Shane Neagle.
Regardless of an asset's fundamentals, its value is determined by one fundamental characteristic: market liquidity. Is it easy for a wide range of people to buy and sell this asset?
If the answer is yes, then the asset receives a large amount of trading volume. This will then make it easier to execute trades at different price levels. The result is a feedback loop that increases investor confidence and market participation through more reliable price discovery.
Since Bitcoin was launched in 2009, it has relied on crypto exchanges to establish and expand market depth. As Bitcoin becomes easier to trade around the world, the price of BTC also tends to rise.
Similarly, if fiat-to-crypto rails such as Mt.Gox or FTX fail, BTC prices will fall significantly. These are just a few obstacles on the path to Bitcoin's legitimacy and adoption.
However, Bitcoin gained a new layer of liquidity in January 2024 when the Securities and Exchange Commission (SEC) approved 11 physically traded Bitcoin exchange traded funds (ETFs).
This is a milestone in liquidity and a new layer of credibility for Bitcoin. The entry into the world of regulated exchanges alongside stocks has depleted the momentum of naysayers questioning Bitcoin's status as decentralized digital gold.
But how will this new market dynamic play out in the long term?
Democratizing Bitcoin with ETFs
From the beginning, Bitcoin’s novelty is both its weakness and strength. On the other hand, it is the monetary revolution that allows us to hold wealth in our heads and transfer that wealth without borders.
Bitcoin miners can transfer Bitcoin without permission, and anyone with internet access can become a miner. Other assets do not have such characteristics. Even gold, which has a relatively limited inflation-resistant supply, can easily be confiscated, as happened in 1933 under Executive Order 6102.
This means that Bitcoin is essentially a democratizing means of wealth. But self-control comes with great responsibility and leaves room for mistakes. Glassnode data shows that Approximately 2.5 million Bitcoins were rendered inaccessible due to the loss of the seed word that could regenerate access to the Bitcoin mainnet.
This is equivalent to 13.2% of Bitcoin's fixed supply of 21 million BTC. In fact, self-custody causes anxiety for both retail and institutional investors. Will fund managers take such risks on their Bitcoin allocations?
However, Bitcoin ETFs have completely changed this dynamic. Investors who want to avoid currency depreciation can now entrust storage to major investment companies. And from BlackRock and Fidelity to VanEck, they're delegating that to select crypto exchanges like Coinbase.
Although this reduces Bitcoin's self-custody capabilities, it increases investor confidence. At the same time, miners are making Bitcoin a decentralized asset through proof of work, regardless of how much BTC is stored in an ETF. And while Bitcoin is a digital asset, it also remains a hard asset based on computing power (hashrate) and energy.
Bitcoin ETF reshapes market trends and investor confidence
Since January 11th, Bitcoin ETFs have opened the floodgates of capital to deepen the Bitcoin market, resulting in cumulative trading volume of $240 billion.This significant capital inflow also changed. Break-even price For many investors, it impacts their strategies and expectations about future profitability.
However, even though the launch was a widely better-than-expected success, negative outflows have grown as the Bitcoin ETF hype has died down.
As of April 30, Bitcoin ETF outflows were negative $162 million, marking the fifth consecutive day of negative outflows. For the first time, Ark's ARKB outflows (yellow) exceeded GBTC (green) by negative $31 million vs. $25 million, respectively.
Given that this is after Bitcoin's fourth halving, which reduced Bitcoin's inflation rate to 0.85%, macroeconomic and geopolitical concerns are weighing on Bitcoin's fundamentals and market depth. It is safe to say that it was temporarily covered up.
This became even more evident when the Hong Kong Stock Exchange's attempt to launch a Bitcoin ETF failed. Despite opening capital access to Hong Kong investors, trading volume was only $11 million ($2.5 million for the Ether ETF), compared to the expected $100 million.
In other words, Hong Kong's crypto ETF debut was nearly 1/60th that of the US. Chinese nationals who have registered their businesses in Hong Kong can also participate, but mainland Chinese investors are still prohibited.
Similarly, considering that the New York Stock Exchange (NYSE) is about five times the size of the HKSE, Bloomberg ETF analysts estimate that the HKSE's Bitcoin/Ether ETF will see $1 billion in flows in its first two years. It is unlikely that this will be exceeded. Eric Balchunas.
Future prospects and potential challenges
During the Bitcoin ETF liquidity extravaganza, BTC price repeatedly explored the threshold above $70,000, reaching an all-time high of $73,700 in mid-March.
However, miners and holders took advantage of the opportunity to apply selling pressure and profit. With spirits prices now settled in the $60,000 range, investors will have more opportunities to buy discounted Bitcoin.
Not only is Bitcoin inflation after the fourth halving 0.85%, compared to the Fed's USD target of 2%, but over 93% of BTC supply has already been mined. The inflow of mined BTC changed from about 900 BTC per day to about 450 BTC per day.
This leads to an increase in the scarcity of Bitcoin, and scarcity tends to increase in value, especially after the legalization of Bitcoin investing at an institutional level through Bitcoin ETFs. According to Bybit analysis: Predicting supply shocks Alex Greene, Senior Analyst at Blockchain Insights said:
“Due to increased institutional investor interest, demand for Bitcoin has stabilized and increased dramatically. This increase will likely further exacerbate the supply shortage and push prices higher post-halving.”
After the last halving, when there was no Bitcoin ETF environment, Bitcoin price increased by 7.8x in less than 480 days. While such a rally becomes less likely as Bitcoin's market cap rises, multiple price increases are still possible.
However, market volatility is still expected for the foreseeable future.and Binance situation resolvedleaving behind a series of crypto bankruptcies throughout 2022, and the main source of FUD remains the government.
in spite of Tom Emmer's efforts, even self-custodial wallets could be targeted as a means of sending money, as the Republican majority has warned. The FBI recently hinted in this direction. caveat The use of “unregistered virtual currency remittance services” is prohibited.
Similarly, the Federal Reserve's interest rate policy could dampen demand for risk-on assets like Bitcoin this year. Despite this, the perception of Bitcoin and the market surrounding it is more mature and stable than ever before.
If the regulatory regime changes course, small businesses may even abandon solutions such as: invoice financing Then move to a system supported by BTC ETFs.
conclusion
After years of being denied spot trading in Bitcoin ETFs, these investment vehicles have created a whole new bridge of liquidity. Even suppressed by Barry Silbert's Grayscale (GBTC), there is evidence of great demand within the organization for highly rated products.
The fourth Bitcoin halving has been delayed, increasing scarcity and ensuring allocation from fund managers. Moreover, the general sentiment is that as long as central banks exist, fiat currencies will be permanently devalued.
After all, how can governments continue to fund themselves despite huge budget deficits?
This will make Bitcoin even more attractive in the long run after holders earn profits from new ATH points. Between these peaks and troughs, Bitcoin's bottom price is likely to continue rising in deeper institutional waters.
