What's driving bitcoin prices & where are they headed next?

Understanding Market Dynamics: The Investor Types

Bitcoin ETFs have been purchasing an average of 10,000 Bitcoin daily, vastly exceeding the daily mining output of just 900 Bitcoin. This results in a demand that exceeds supply by over ten times. The total assets under management for the top ten Bitcoin ETFs have skyrocketed to around $50 billion, with BlackRock's Bitcoin ETF at the forefront, accumulating $10 billion in assets, followed by Fidelity's ETF, which holds $6 billion in assets.

Institutional Interest Fuels the Rally

The slow but steady adoption of spot Bitcoin ETFs by traditional financial institutions suggests a burgeoning stream of capital flowing into Bitcoin. This process, albeit gradual, is expected to maintain a steady demand for Bitcoin. Moreover, the passive investment strategies employed by these institutions, which automatically allocate funds to certain assets, are likely to include Bitcoin ETFs, further amplifying the demand. Analysts expect pension fund managers would inevitably succumb to lure of the ETFs.

A Supply Crunch

Bitcoin market is on the verge of a halving event, a pre-programmed reduction in the rate at which new Bitcoins are created. Scheduled to occur in April, this halving will decrease the daily production of Bitcoin from 900 to just 450 coins. The anticipation of this supply shock, where the rate of new supply entering the market halves, is further fueling the rally. A crucial element driving Bitcoin's price surge is its finite supply. With merely a fraction of Bitcoin's total supply available for trading on exchanges, the market is experiencing a pronounced supply shortage. This limited availability, combined with the rapid acquisition of Bitcoin by spot ETFs, creates a foundation for potential price increases, rooted in fundamental supply and demand principles.

Crypto Whales and Market Influence

Crypto whales have historically wielded considerable influence over market prices through their significant holdings. Their reaction to the influx of institutional money, particularly through spot Bitcoin ETFs, is a development worth watching. The potential for strategic buying and selling by these whales could introduce volatility and unexpected shifts in the market.

Retail Investors' Role

Retail interest in crypto tends to spike with market rallies. However, a significant portion of retail investors has yet to engage in the current cycle, potentially leaving room for further growth as they enter the market.

Metrics employed to measure retail enthusiasm for cryptocurrencies, such as Google search volumes, have shown subdued activity compared to the levels observed in 2021 and 2022, based on data from Google Trends.

The Altcoin Conundrum

While Bitcoin has been the focal point of recent market enthusiasm, the impact on altcoins remains uncertain. The influx of institutional money into Bitcoin via spot ETFs may not necessarily translate into similar gains for altcoins. However, the actions of crypto whales, who may diversify their investments into altcoins, could dictate the market's direction for these other cryptocurrencies.

A Unique Market Cycle

The current crypto market cycle is characterised by unique features, including unprecedented institutional involvement and evolving regulatory landscapes. This has resulted in Bitcoin hitting all time highs before halving. In all previous market cycles, the all time highs happened after the halving. These elements differentiate it from previous cycles and are crucial in understanding Bitcoin's price dynamics and the potential pathways the market could take with Jerome Powell signalling reduced rates later in the year leading to a rally in the markets.

What Lies Ahead

The market is navigating through uncharted territory, with Bitcoin's price rally being driven by a combination of institutional interest, regulatory developments, global liquidity and the actions of market whales. The continued influx of institutional capital, the constrained supply of Bitcoin, and the evolving interest from retail and crypto whales paint a complex picture of the market's future trajectory.

As we look to the future, it's clear that the crypto market is in a state of flux, with various forces at play that could influence the direction of Bitcoin and altcoins. Staying informed and adaptable will be crucial for those looking to navigate this volatile yet potentially rewarding landscape.

(The author is Vice President, WazirX)

Source: Forex-Markets-Economic Times