$BTC

The simple economic principle of “supply and demand” may explain the explosion that has ignited the cryptocurrency market collectively, and Bitcoin in particular.

According to Coinshares head of research James Butterfill, while 900 bitcoins are mined daily, orders for newly issued US ETFs are averaging 2,800 bitcoins per day.

“This has resulted in a 28% decline in exchange holdings since 2020, suggesting the market is experiencing a significant demand shock,” Butterfill said.

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Spot Bitcoin ETFs once again broke their daily trading volume record on February 28, 2024, as the cryptocurrency’s price soared to $64,000 on some exchanges before quickly falling to nearly $60,000 within minutes.

The massive rally has propelled bitcoin to its biggest monthly gain since December 2020, when the digital token jumped 50% to around $9,600.

Bitcoin market cap rises

The cryptocurrency has more than tripled in value since the start of last year, rebounding from a 64% decline in 2022, in a remarkable comeback from a series of crypto industry scandals and bankruptcies that have raised questions about the viability of digital assets.

Cryptocurrencies are soaring even as investors have scaled back expectations for looser monetary policy this year, as evidenced by rising U.S. Treasury yields. Bitcoin has outperformed traditional assets such as stocks and gold in 2024.

“This reversal is all the more impressive given that central banks are signaling that they intend to keep interest rates higher for longer, eroding the theory that the next crypto rally will be driven by interest rate cuts,” said Michael Savaii, co-founder of quantitative trading firm Dexterity Capital.

Massive inflows into Bitcoin ETFs

This comes as massive inflows into Bitcoin ETFs have prompted some industry watchers to warn of a looming supply squeeze as new cryptocurrencies from miners fail to keep up with demand. Analysts say around 80% of Bitcoin’s supply has been unchanged in the past six months, potentially exacerbating the squeeze and adding upward pressure on prices.

The nine new spot ETFs hold more than 300,000 bitcoins, or 7 times the amount of new coins mined since January 11. After the expected halving in late April, the number of new coins mined daily will drop to 450 from the current 900. If that demand holds, as the supply of new coins is halved, proponents expect the price to have room to rise.

“All of this combined creates an imbalance between supply and demand,” said Dan Slavin, founder of cryptocurrency hedge fund Dan Slavin. “More demand than supply means higher prices, and with Bitcoin’s volatile price, higher prices don’t mean 10%, they mean much more.”

Bitcoin Prices and Interest Rate Cut Expectations

“Bitcoin’s surge to a high of $64,000 has raised curiosity about what factors led to this surge,” Butterfill added.

“Until recently, Bitcoin prices closely aligned with expectations of interest rate cuts, but have since diverged following the launch of U.S. spot currency exchange-traded funds. These ETFs have had a significant impact on recent price movements.

In total, Bitcoin exchange-traded funds hit a new daily record on Feb. 28, 2024, with more than $6 billion traded, according to Bloomberg Intelligence ETF Research analyst James Seyfart. The increased volume surpassed the previous daily volume record set on the day the products launched, Seyfart noted.

In summary, demand from Bitcoin spot funds, which have pushed demand to unprecedented levels, the upcoming halving event in April, which will reduce supply, and the possibility of a Fed rate cut in June, thus increasing speculative appetite, could all drive Bitcoin to new record highs.