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Bitcoin: From Spot ETF Inflows to All-Time Highs
None of us is bullish enough on bitcoin’s price. None? Ok, let me be more precise: Nobody is bullish enough besides Gigachad Michael Saylor.
The presented simplified model of equilibrium price is supposed to provide a rough orientation of the stage of the current bull market and an idea of a BTC price target backed by fundamental spot ETF net inflows. Please note that there will be violent short-term volatility in the meantime, which the model does not try to predict.
1. The Fundamentals
To simplify the analysis below, I will focus on incremental supply and demand for bitcoin, which in my opinion are inevitably going to lead to new all-time highs this year.
1.1. Incremental Supply
Every block currently earns miners a block reward of 6.25 BTC. Since Bitcoin produces a new block on average every 10 minutes, there is currently an additional supply of 900 BTC per day (6.25 BTC per day x 6 blocks per hour x 24 hours per day). Bitcoin is capped at 21 million total supply with a block reward halvening every 4 years. According to @NiceHashMining the next Halvening is expected to happen on May 02, 2024 and will reduce daily additional issuance to 450 BTC.
Liquidation to Production Ratio describes the ratio of BTC miners immediately dump divided by additionally mined supply. When Liquidation to Production Ratio is at 100%, all 900 daily mined BTC come into the market as additional supply. This becomes relevant later in the thesis.
To simplify the analysis, one-time effects are ignored. These include existing BTC stashes of miners, US government selling BTC and insolvent exchange repayments (Mt. Gox, FTX, Celsius). In my opinion these will drive short-term volatility but do not change the big picture.
1.2. Incremental Demand
We memed it into reality: The institutions are here to buy our pristine monetary asset created by Lord Satoshi. After January 10, 2024, the world changed forever as Bitcoin’s greatest antagonist, SEC Chairman Gary Gensler, ultimately bends the knee and grants approval for the Bitcoin ETF with a decisive vote in a 2–2 tie. In retrospect approval was inevitable after courts stated that the SEC acted “arbitrary and capricious” denying conversion of Grayscale’s GBTC into an ETF, which became the widow-maker trade in 2022. Additionally, Larry Fink, founder and CEO of the most influential asset manager BlackRock, got orange-pilled and became an outspoken proponent of Bitcoin hailing it as hedge against government overreach and currency devaluation. There are other pioneers that were early to Bitcoin, amongst others, Cathie Wood, Stanley Druckenmiller, and last but not least, the legend Michael Saylor. However, in my opinion Larry Fink’s backing lifts Bitcoin’s legitimacy such that we witnessed the birth of a new asset class.
I will focus on ETF inflows as incremental supply because they enable TradFi (Traditional Finance) access to Bitcoin. Smart money that already had access to Bitcoin for years. However, the spot ETF grants broad access to the new asset class to TradFi players such as pension funds and wealth managers, as well as boomers that were reluctant to trust crypto exchanges, let alone handle their own private keys. More importantly, the aforementioned new market entrants are under-allocated to cryptocurrency, and thus their purchases are going to be price agnostic in the short- to medium-term.
Apart from the ETF pundits @JSeyff and @EricBalchunas, nobody expected the overwhelming demand for Bitcoin ETFs. In the first 26 trading days net inflow accumulated to USD 4.9 bn, chart and figures from @FarsideUK .
Daily net inflows weren’t below USD 300 mn in the last 7 trading sessions. The average net inflow over 26 days is USD 190 mn, over the last 14 sessions USD 287 mn, and in the last 7 USD 459 mn.
Thus, demand is picking up. This is related to the fact that the GBTC outflows are decreasing. Additionally, Wall Street’s sales forces are starting to market BTC ETFs and more wealth managers are getting onboarded every day.
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