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Bitcoin’s Supply Shock Thesis: How Halving, ETFs, and HODLers Could Drive Up the Price

Bitcoin has been showing remarkable resilience amid the recent market volatility. Despite the sell-off triggered by the approval of eleven spot bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission (SEC), bitcoin has managed to hold above the $43,000 level, a 84% increase from a year ago.

But this could be just the beginning of a new bull run, according to some analysts who believe that bitcoin is facing a supply shock that could boost its value significantly. The supply shock thesis is based on three main factors: the upcoming halving event, the growing demand from institutional investors, and the strong conviction of long-term holders.

Source: CryptoQuant

The Halving Effect

The halving event is a pre-programmed feature of the bitcoin protocol that reduces the amount of new bitcoins created every 10 minutes by 50%. The next halving, which will occur in about 77 days, will lower the block reward from 6.25 to 3.125 bitcoins. This will reduce the annual inflation rate of bitcoin from around 1.8% to 0.9%, making it scarcer than gold.

The halving event is widely anticipated by the bitcoin community, as it has historically coincided with significant price increases. The first halving in 2012 was followed by a 8,000% surge in the next year, while the second halving in 2016 preceded a 2,800% rally in the next 18 months. The third halving in 2020 also sparked a 500% uptrend that peaked at over $69,000 in April 2021.

The halving effect is based on the assumption that the demand for bitcoin remains constant or increases, while the supply decreases. This creates a supply-demand imbalance that drives up the price. The halving also serves as a catalyst for media attention, public awareness, and investor interest, which further fuels the demand.

The ETF Effect

The approval of eleven spot bitcoin ETFs by the SEC in January 2024 was a landmark decision that opened the door for mainstream adoption of the cryptocurrency. Spot bitcoin ETFs are funds that track the price of bitcoin and hold the underlying asset in custody, allowing investors to gain exposure to bitcoin without having to deal with the technical and security challenges of buying and storing it directly.

The spot bitcoin ETFs have attracted billions of dollars in inflows from institutional and retail investors, who see them as a convenient and regulated way to access the bitcoin market. According to data from CryptoCompare, the total assets under management (AUM) of the eleven spot bitcoin ETFs reached $28.7 billion as of Feabuary 2024, with an average daily trading volume of $1.2 billion.

The spot bitcoin ETF market, however, is not homogeneous, as different funds have different characteristics, such as management fees, liquidity, and premium or discount to the net asset value (NAV). The oldest and largest spot bitcoin ETF, the Grayscale Bitcoin Trust (GBTC), has been facing selling pressure due to its high management fee of 1.5%, which erodes its returns over time. GBTC also trades at a significant discount to its NAV, meaning that investors can buy the fund for less than the value of the bitcoin it holds.

On the other hand, newer and cheaper spot bitcoin ETFs, such as the BlackRock Bitcoin ETF (IBIT) and the Fidelity Bitcoin ETF (FBTC), have been gaining market share and popularity. IBIT and FBTC charge a management fee of only 0.25% and 0.15%, respectively, making them more attractive for cost-conscious investors. They also trade at a slight premium to their NAV, indicating strong demand.

The spot bitcoin ETF market could become even more competitive and diverse in the near future, as more players enter the field. According to Bloomberg’s Eric Balchunas, the financial giant Charles Schwab could launch its own spot bitcoin ETF, which would charge a management fee of only 0.1%, undercutting its rivals. Balchunas also speculated that Schwab’s ETF could attract a large amount of assets from its existing client base, which includes millions of individual investors and advisors.

“Charles Schwab may shock the world & offer something that’s 10bps in a few months. They’re never first to market in anything but they make back impact when they come in.” – Eric Balchunas, Bloomberg

The proliferation of spot bitcoin ETFs could create a demand shock for the cryptocurrency, as more investors seek to gain exposure to its potential returns and diversification benefits. The spot bitcoin ETFs also increase the transparency and legitimacy of the bitcoin market, as they are subject to regulatory oversight and reporting requirements.

The HODLer Effect

The third factor that could contribute to the supply shock thesis is the behavior of long-term holders, or HODLers, who are investors who have not moved their bitcoins for at least a year. According to data from CryptoQuant, the amount of bitcoin held by HODLers reached a record high of 12.8 million in Febuary 2024, representing about 68% of the total supply.

The HODLer effect reflects the strong conviction and loyalty of the bitcoin community, who believe in the long-term value proposition of the cryptocurrency. HODLers are less likely to sell their bitcoins, even during periods of high volatility or price appreciation, as they have a low time preference and a high opportunity cost. HODLers also benefit from the reduced tax implications and transaction fees of holding rather than trading.

The HODLer effect reduces the amount of bitcoin available for sale on the market, creating a scarcity premium that increases its value. The HODLer effect also creates a positive feedback loop, as higher prices incentivize more investors to hold rather than sell, further reducing the supply.

The Perfect Storm

The combination of the halving, the ETF, and the HODLer effects could create a perfect storm for the bitcoin market, as the supply of the cryptocurrency becomes increasingly constrained, while the demand from various sources continues to grow. This could result in a supply shock that drives up the price of bitcoin to new highs, potentially reaching the six-figure range.

Of course, the supply shock thesis is not a guarantee, as there are many factors that could affect the bitcoin market, such as regulatory uncertainty, technical issues, security breaches, market manipulation, or black swan events. The bitcoin market is also highly volatile and unpredictable, and past performance is not indicative of future results.

However, the supply shock thesis is a compelling narrative that captures the unique dynamics and fundamentals of the bitcoin market, and provides a bullish outlook for the cryptocurrency in the medium to long term. As the halving event approaches, the spot bitcoin ETF market expands, and the HODLers remain steadfast, the supply shock thesis could become a self-fulfilling prophecy.

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