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1 reason for the new Bitcoin mania: “just not enough” supply
There is a fundamental law of economics at play in the new market mania surrounding bitcoin (BTC-USD): supply and demand.
On average, more bitcoins are purchased every day than new coins are created.
One of the main reasons for this imbalance is the appetite created by a series of US-listed Bitcoin exchange-traded funds that were approved by the Securities and Exchange Commission in January and have attracted significant sums of new investors over the past month.
The price of Bitcoin is approaching its all-time high reached in 2021. (Dado Ruvic/REUTERS/Illustration/File Photo) (Reuters / Reuters)
Since the beginning of February, these products have purchased an average of between 3,500 and 4,300 coins each day, according to three analysts who work for cryptocurrency managers.
This is far more than the 900 coins created each day by the Bitcoin network during the same period.
“There simply aren’t enough bitcoins to meet all the new demand, and so the natural dynamics of supply and demand are driving prices up,” said Zach Pandl, research director at Grayscale Investments .
Bitcoin surpassed $63,000 on Thursday, putting it within striking distance of its all-time high of nearly $69,000 hit in November 2021. It was changing hands at around $62,220 early Friday.
It closed February with gains of 44%, its best monthly performance since December 2020.
A “halving”
There could be further supply issues due to a planned halving in two months.
When it was created in 2009 by pseudonymous programmer Satoshi Nakamoto, bitcoin was programmed with a fixed supply schedule that is halved every four years.
After the next reduction, called halving, the daily supply of new coins will be 450 instead of 900.
This could drive up prices.
“We are potentially in the best situation here,” Mark Connors, head of research for crypto asset manager 3iQ, told Yahoo Finance. “We cannot produce more bitcoins to meet demand.”
Connor’s company set its mid-to-high-end price target for bitcoin this year at $160,000 to $180,000. Next year, he projects an impressive target of $350,000 to $450,000 per piece.
Another fund manager, VanEck, set a 2024 price target of $80,000 for bitcoin last quarter.
“Those estimates are admittedly a little bit outdated now,” said Matthew Sigel, head of digital assets research at VanEck.
“Pure speculative demand”
There are certainly other factors at work in the current supply crisis, beyond ETF demand.
One example: According to blockchain analytics platform Arkham Intelligence, the US government currently holds 215,000 BTC, a reserve that includes confiscations during various seizures, such as during the hack of the crypto exchange Bitfinex in 2016.
The story continues
The fact that they are simply held and not sold at present limits supply. But that could change when the government has to distribute part of this sum to victims, which could involve selling it.
Another big holder and buyer right now is MicroStrategy (MSTR), which announced Monday morning that it had acquired an additional 3,000 BTC. This brought its total investment to 193,000 BTC, valued at over $11.8 billion as of Wednesday.
As asset prices rise, many institutional buyers will need to take profits to keep their portfolios balanced, VanEck’s Sigel said. This could also change the imbalance between supply and demand.
There are also certainly less fundamental, and more psychological, factors at the origin of this new rally, notably the fear of missing out.
“It’s certainly a representation of risk appetite,” Sam Stovall, chief investment strategist at CFRA Research, told Yahoo Finance Live.
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 a return, so it is a purely speculative request. »
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas of finance.
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