The following is a guest post by Shane Neagle.
Regardless of an asset's fundamentals, its value is governed by one underlying characteristic: market liquidity. Is it easy for the general public to sell or buy this asset?
If the answer is yes, the asset receives high trading volume. When this happens, it is easier to execute trades at varying price levels. In turn, a feedback loop is created: stronger price discovery builds investor confidence, which spurs greater market participation.
Since Bitcoin's launch in 2009, it has relied on crypto exchanges to establish and expand its market depth. The easier it became to trade Bitcoin around the world, the easier it became for the price of BTC to rise.
Likewise, when fiat-crypto rails such as Mt. Gox or FTX fail, the price of BTC suffers greatly. These are just a few obstacles on the path to Bitcoin legitimization and adoption.
![](https://cryptoslate.com/wp-content/uploads/2024/05/blockchain-industry-challenge.jpg)
However, when the Securities and Exchange Commission (SEC) approved 11 spot-traded Bitcoin exchange-traded funds (ETFs) in January 2024, Bitcoin gained a new layer of liquidity.
This is a liquidity milestone and a new level of credibility for Bitcoin. The entry into the world of regulated exchanges, alongside stocks, has removed naysayers who questioned Bitcoin's status as decentralized digital gold.
But how does this new market dynamic manifest itself in the long term?
The democratization of Bitcoin thanks to ETFs
From the start, The novelty of Bitcoin lies in its weakness and its strength. On the one hand, it is a monetary revolution to hold wealth in one's head and then be able to transfer it without borders.
Bitcoin miners can transfer it without permission, and anyone with access to the Internet can become a miner. No other asset has this property. Even gold, whose supply is relatively limited and resistant to inflation, can be easily confiscated, as happened in 1933 under Executive Order 6102.
This means that Bitcoin is an inherently democratizing wealth vehicle. But with self-care comes great responsibility and room for error. Glassnode data shows that around 2.5 million bitcoins became inaccessible due to the loss of seed words that can regenerate access to the Bitcoin mainnet.
This represents 13.2% of Bitcoin's fixed supply of 21 million BTC. Indeed, self-custody causes anxiety among retail and institutional investors. Would fund managers engage in Bitcoin allocation with such risk?
But Bitcoin ETFs have completely changed this dynamic. Investors seeking protection against currency depreciation can now delegate custody to large investment companies. And they, from BlackRock and Fidelity to VanEck, delegate it to select crypto exchanges like Coinbase.
Although this reduces the self-custody function of Bitcoin, it increases investor confidence. At the same time, miners, via proof of work, still make Bitcoin a decentralized asset, regardless of the amount of BTC hoarded in ETFs. And Bitcoin remains both a digital asset and a physical asset based on computing power (hashrate) and energy.
Bitcoin ETFs are reshaping market dynamics and investor confidence
Since January 11, Bitcoin ETFs have opened the floodgates of capital to deepen the depth of the Bitcoin market, generating a cumulative volume of $240 billion. This significant influx of capital also changed the equilibrium price for many investors, influencing their strategies and expectations for future profitability.
Still, although the launch far exceeded expectations, negative outflows gained traction as the Bitcoin ETF hype subsided.
![](https://cryptoslate.com/wp-content/uploads/2024/05/ibit-.jpg)
![](https://cryptoslate.com/wp-content/uploads/2024/05/ibit-.jpg)
As of April 30, Bitcoin ETF flows had generated a negative $162 million, marking the fifth consecutive day of negative outflows. For the first time, Ark's ARKB (yellow) releases surpassed GBTC (green), with a negative $31 million versus $25 million respectively.
Given that this occurred after the fourth Bitcoin halving, which reduced Bitcoin's inflation rate to 0.85%, it is safe to say that macroeconomic and geopolitical concerns have temporarily overshadowed fundamentals of Bitcoin and deepened the depth of the market.
This was even more evident when the opening of Bitcoin ETFs by the Hong Kong Stock Exchange was unsuccessful. Despite opening access to capital to Hong Kong investors, volume was only $11 million ($2.5 million in Ether ETFs), compared to an expected $100 million.
In short, crypto ETF debuts in Hong Kong were nearly 60 times lower than those in the United States. Although Chinese citizens with businesses registered in Hong Kong can participate, investors from mainland China are still prohibited.
Likewise, given that the New York Stock Exchange (NYSE) is approximately five times larger than the Hong Kong Stock Exchange, the Hong Kong Stock Exchange's Bitcoin/Ether ETFs are unlikely to exceed $1 billion in price. of the first two years, according to Bloomberg ETF analyst. Eric Balchunas.
Future prospects and potential challenges
During the Bitcoin ETF liquidity extravaganza, BTC price repeatedly probed above $70,000, hitting the new all-time high of $73.7k in mid-March.
However, miners and holders took advantage of this opportunity to exert selling pressure and reap gains. With spirits now moderated at the $60,000 range, investors will have greater opportunities to buy Bitcoin at a discount.
Not only is Bitcoin's inflation rate at 0.85% after the fourth halving, compared to the Fed's 2% target in US dollars, but over 93% of the BTC supply has already been extracted. The influx of mined BTC increased from around 900 BTC per day to around 450 BTC per day.
This results in greater scarcity of Bitcoin, and what is rare tends to become more valuable, especially after legitimizing Bitcoin investment at the institutional level through Bitcoin ETFs. So much so that Bybit's analysis supply shock predictions on exchanges by the end of 2024. Alex Greene, principal analyst at Blockchain Insights, said:
“The rise in institutional interest has stabilized and significantly increased demand for Bitcoin. This increase will likely exacerbate the shortage and drive up prices after the halving.
After previous halvings in the absence of the Bitcoin ETF environment, the price of Bitcoin increased by as much as 7.8 times gains in 480 days. Although a higher Bitcoin market cap makes such gains less likely, multiple increases in appreciation remain on the table.
![](https://cryptoslate.com/wp-content/uploads/2024/05/bitcoin-halving-rallies.jpg)
![](https://cryptoslate.com/wp-content/uploads/2024/05/bitcoin-halving-rallies.jpg)
In the meantime, however, market volatility should be expected. With Binance situation resolvedBesides leaving behind the string of crypto bankruptcies in 2022, the main source of FUD remains the government.
Despite Tom Emmer's efforts, as Republican majority whip, even self-custody wallets could be targeted as money transmitters. The FBI recently hinted in this direction with the warning against the use of “unregistered cryptocurrency transmission services”.
Likewise, this year, the Federal Reserve's interest rate policy could suppress appetite for risky assets like Bitcoin. Nevertheless, the perception of Bitcoin and the market surrounding it has never been more mature and stable.
If the regulatory regime changes course, small businesses could even abandon solutions such as invoice financing and upgrade to a BTC ETF supported system.
Conclusion
After years of refusing Bitcoin ETFs for spot trading, these investment vehicles have erected entirely new liquidity bridges. Even suppressed by Barry Silbert's Grayscale (GBTC), they proved to be strong institutional demand for an appreciating product.
With the fourth Bitcoin down by half, increased scarcity and fund manager allocations are now a certainty. Furthermore, the prevailing sentiment is that fiat currencies will be perpetually devalued as long as central banks exist.
After all, how could governments continue to finance themselves despite huge budget deficits?
This makes Bitcoin all the more attractive in the long term after holders reap the benefits of new ATH points. Between these highs and lows, the Bitcoin bottom will likely continue to rise into deeper institutional waters.