In the new market madness surrounding Bitcoin (BTC-USD), a fundamental economic law plays a role: supply and demand.
On average, more Bitcoins are purchased every day than new coins are created.
A big reason for this imbalance is the appetite created by a series of U.S.-listed Bitcoin exchange-traded funds that were approved by the Securities and Exchange Commission in January and attracted significant amounts of new investor money last month have.
Bitcoin price is nearing its all-time high in 2021. (Dado Ruvic/REUTERS/Illustration/File Photo) (Reuters/Reuters)
According to three analysts working for crypto money managers, an average of 3,500 to 4,300 coins per day have been purchased using these products since the beginning of February.
This is significantly more than the 900 coins that the Bitcoin network creates daily during the same period.
“There is simply not enough Bitcoin to meet all of the new demand, and so natural supply/demand dynamics are driving prices higher,” said Zach Pandl, head of research at Grayscale Investments.
Bitcoin rose above $63,000 on Thursday, putting it within striking distance of its all-time high of nearly $69,000 reached in November 2021. It was changing hands at about $62,220 early Friday.
It ended February up 44%, its best monthly performance since December 2020.
A “halving”
There could be further supply issues due to a “halving” scheduled to take place in two months.
When Bitcoin was created in 2009 by pseudonymous software programmer Satoshi Nakamoto, it was programmed with a fixed delivery schedule that halved every four years.
After this next cut, called halving, the daily supply of new coins will be 450 instead of 900.
That could drive up prices.
“We may be in the best position here,” Mark Connors, head of research at crypto asset manager 3iQ, told Yahoo Finance. “We cannot produce more Bitcoin to meet demand.”
Connor's firm has set its mid-to-high price target for Bitcoin this year at $160,000 to $180,000. A staggering target of $350,000 to $450,000 per coin is expected next year.
The story goes on
Another asset manager, VanEck, set a price target of $80,000 for Bitcoin by 2024 last quarter.
“These estimates are now admittedly somewhat outdated,” said Matthew Sigel, head of digital asset research at VanEck.
“Purely speculative demand”
In addition to the demand for ETFs, there are certainly other factors at work in the current supply shortage.
For example: According to blockchain analytics platform Arkham Intelligence, the US government currently has 215,000 BTC, a stockpile that includes seizures in various seizures, such as the 2016 hack of crypto exchange Bitfinex.
The fact that they are currently only held and not sold limits supply. But that could change if the government needs to distribute some of it to victims, which may mean a sale.
Another major holder and buyer currently is MicroStrategy (MSTR), which announced on Monday morning that it had acquired an additional 3,000 BTC. This brought the total investment to 193,000 BTC, which was worth over $11.8 billion as of Wednesday.
When the asset price rises, many institutional buyers need to take profits to maintain balance in their portfolios, VanEck's Sigel said. This could also change the imbalance between supply and demand.
There are also certainly less fundamental and more psychological factors driving this new rally, including fear of missing out.
“It's certainly a reflection of risk appetite,” Sam Stovall, chief investment strategist at CFRA Research, told Yahoo Finance Live.
The ETFs have made the ability to hold bitcoin “much easier, especially for investors who are not tech-savvy,” said Eric Rosengren, former president and CEO of the Federal Reserve Bank of Boston.
“It doesn’t really change the fundamental, underlying fact [bitcoin] does not generate any return, so it is purely speculative demand.”
David Hollerith is a senior reporter at Yahoo Finance, covering banking, crypto and other financial areas.
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