Bitcoin ETF demand turns negative around BTC halving

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The desire for new Bitcoin investment offerings is decreasing following Bitcoin’s fourth “halving” occurrence, which is a significant event in its history.

Institutional investors began looking to Bitcoin exchange-traded funds (ETFs), introduced in January 2024, as a significant reference point for investing in Bitcoin (BTC).

In just a few months after being approved by US regulators in January, the eleven Bitcoin ETFs with over $13 billion in combined assets under management collectively surpassed a milestone that gold ETFs took years to achieve.

At the height of their popularity, Bitcoin ETFs experienced approximately $1 billion in daily inflows, which represented institutional investors shifting funds from the Grayscale Bitcoin Trust (GBTC) towards these newly introduced ETFs.

A significant milestone in Bitcoin’s history is the halving, which happens approximately every four years. During this event, the reward given to miners for each new block they add to the blockchain gets cut in half. Consequently, the number of freshly minted Bitcoins entering the market daily is diminished by half as well. Recently, the reward has been decreased from 6.25 BTC to 3.125 BTC.

After the Bitcoin halving in April 2020, the supply of new coins entered the market at a lower rate while demand for BTC through ETFs remained strong. This situation was forecasted by several market analysts to potentially cause a scarcity or shock in the Bitcoin supply.

After several weeks of Bitcoin ETFs experiencing consistent inflows, the appetite for these products seems to be waning.

Are geopolitics to blame for BTC ETF outflows?

Some market experts believed that the sell-offs of GBTC (Grayscale Bitcoin Trust) would come to an end once institutions exhausted their supply of GBTC shares for sale. However, recent developments indicate that investors are withdrawing funds from ETFs instead.

Before the Bitcoin halving event, there were successive days with significant withdrawals from Bitcoin ETFs that track the spot price, totaling hundreds of millions of dollars.

Despite the present economic slump, Jag Kooner, the derivatives chief at Bitfinex, is optimistic that the desire for ETFs will regain momentum following the halving event.

“The decrease in Bitcoin inflows and increased outflows isn’t linked to the recent halving event, but rather to the current downturn in the SPX and Nasdaq markets and geopolitical issues. Bitcoin ETFs represent an alternative investment or a smaller component of large traditional finance portfolios. It seems that investors are rebalancing their riskier assets in response to these market conditions and reducing their exposure to Bitcoin.”

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Kooner pointed out that Bitcoin’s strong surge in value starting from January 2024 wasn’t solely due to ETF approvals. Market players also joined in, anticipating how the launch of spot Bitcoin ETFs could influence the cryptocurrency’s price.

In other words, the flow of assets is predicted to become more stable, which could lead to increased optimistic betting among investors as the market shifts back into a bullish phase.

Bitcoin supply shock theory takes a backseat

During the initial three months, the BTC ETF saw inflows ranging between three to ten times the daily bitcoin mining output of approximately 900 BTC. The substantial ETF demand, fueled by institutions like MicroStrategy, caused some market experts to anticipate a post-halving shortage in supply.

A Bybit analysis indicated that Bitcoin reserves on trading platforms could run out in about nine months following the halving event, whereas some other experts projected a six-month window. Based on information provided by the cryptocurrency analysis firm CryptoQuant, the quantity of Bitcoin held on centralized exchanges dropped to a three-year minimum of 1.94 million BTC as of April 16th.

Ki Young Ju, the CEO of CryptoQuant, expressed a comparable viewpoint, indicating that Bitcoin might encounter a significant reduction in supply availability within the next six months following the halving event.

Starting from the third week of April, the demand for ETFs has decreased, resulting in successive daily net outflows. The demand for these funds came to a standstill towards the end of March, marking the first week with net outflows for Bitcoin.

Bitcoin ETF demand turns negative around BTC halving

Young explained that the interest in purchasing ETFs could pick up again if Bitcoin‘s price nears significant underlying costs for new major investors, primarily ETF buyers, which are around $56,000 each. In simpler terms, when the price of Bitcoin hits this threshold, large investors who typically buy through ETFs will consider it a worthwhile investment. The cost basis refers to the total amount originally spent, including any transaction fees.

Kooner pointed out that large-scale investors with substantial stockpiles are frequently overlooked. He further suggested that a significant transfer of assets from these long-term investors might occur towards the end of the present market trend.

“The demand for spot Bitcoin ETFs is unprecedented by all accounts, but a single metric cannot measure demand for BTC itself. However, the market decline is evidence enough that the demand doesn’t currently outstrip BTC supply on an absolute basis.”

Slowing ETF interest for stocks contrasts with rising open positions in Bitcoin options. This suggests that long-term investors are holding back, while traders focused on market swings are actively engaging.

According to Josef Teteck, Bitcoin advocate at Trezor, an ETF (Exchange Traded Fund) does not automatically indicate increased institutional interest in cryptocurrency.

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According to American laws, ETFs (Exchange-Traded Funds) can be accessed by both large institutions and individual investors. Consequently, it’s challenging to anticipate which factors will have the most significant effect on supply and demand in the immediate future.

“Taking a longer-term view and turning away from U.S. markets, there is rising demand for Bitcoin in countries across the globe as fiat currencies fail as a reliable store of value and even in some countries as a viable medium of exchange.”

During February and March, there was a widely held belief that the supply shock caused by Bitcoin’s halving would have a significant impact. This belief persisted despite heavy investments into spot Bitcoin ETFs, which was offset by outflows from GBTC and new record-high prices for Bitcoin. However, right before the halving event took place, the inflows into ETFs slowed down noticeably, and Bitcoin’s price dropped nearly 10% from its all-time high. As a result, some analysts began to question the short-term validity of the supply shock theory.

Some experts believe that the demand for a Bitcoin ETF could hit record levels once market conditions become more favorable following the cryptocurrency’s halving event.

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2024-04-22 16:34