Ledn’s Weekly Hodl: Bitcoin’s Dual Shock 2024
Week of Monday October 23rd
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Bitcoin Market Analysis
Last week the sentiment around a spot Bitcoin ETF approval went from “probable” to “near certainty”.
After the SEC deadline to appeal a court loss to GBTC expired last week, Gary Gensler gave an interview where he suggested that “the staff was reviewing 8 or 10 applications” and described the time-tested process that “asset managers” or any other issuer needs to go through to list these funds. This is a process that Blackrock and other applicants are intimately familiar with - so, if this is the last hurdle to cross, it’s only a matter of time.
Later last week, Cointelegraph, incorrectly broke the news that the Blackrock spot Bitcoin ETF had been approved, and bitcoin price spiked more than 10%.
While the news turned out to be false, bitcoin’s price movement was very real. It held on to gains of +10.37% for the week, and is trading north of $33,000 at the time of writing.
The key support and resistance levels that we’re monitoring from a technical perspective are:
Resistance 2: $38,000 USD/BTC
Resistance 1: $35,000 USD/BTC
Current Price: $33,500 USD/BTC
Support 1: $30,000 USD/BTC
Support 2: $26,000 USD/BTC
Our Weekly Essay: Bitcoin’s Dual Shock 2024
The market price of a good or service is largely determined by its supply and demand.
As most economic theory suggests, as the price of a good increases, the supply for that good should also increase. If you can get more money for selling something you have, or something you can produce, you’ll be more enticed to sell it, or produce more of it. Pretty simple.
Similarly, as the price of a good or service becomes lower, it typically results in higher demand for that same good. If people that are buying that good can afford more of it, they will generally purchase more of it.
The point at which the Supply and Demand lines meet is called the “equilibrium price”.
These are the human incentives that drive the shape of the “Supply and Demand” graph that we are all familiar with:
In today’s essay, we’ll explore how Bitcoin’s supply and demand curves will be impacted by the upcoming spot bitcoin ETF approvals, and The Halving. From there, we’ll draw implications on bitcoin prices, and how investors could be positioning ahead of 2024.
Bitcoin’s Current Equilibrium
The supply and demand curves for bitcoin have unique characteristics.
On the supply side, the only “new” bitcoins that are being added to circulating supply are those paid to miners as rewards. Presently, the network pays out 6.25 Bitcoin every 10 minutes - meaning that approximately 27,375 BTC are paid to miners every month. These bitcoins are considered “supply”, since miners operate on thin margins and often have to sell the bitcoin they produce to pay for expenses (they also use bitcoin-backed loans to manage their cash flow, and hold on to as much bitcoin as they can).
On the demand side, the main driver comes from people looking to protect their savings from inflation. This can take the form of recurring purchases every month to save a bit of your paycheque (dollar-cost averaging), or larger purchases to reallocate part of a person or company’s investment portfolio into Bitcoin (think Microstrategy purchases).
Because bitcoin is a new asset class, there are still large pockets of investors that are not able or willing to invest in bitcoin due to investment mandate restrictions or preferences. For example, some investment funds are only allowed to invest in U.S.-listed companies, or funds that are above a certain market capitalization, or trade a minimum daily volume. Others can only invest from brokerage retirement accounts, and cannot access spot bitcoin markets.
The Upcoming Shocks
As our readers already know, there are 2 big events that will impact bitcoin in the near future. 1) The Spot Bitcoin ETF Approval(s) - tentatively scheduled for January-March 2024, and 2) the Bitcoin Halving, tentatively scheduled for April 2024.
If we were to model the current supply and demand graph for bitcoin, it would look like this:
Both of these events will impact Bitcoin’s supply and demand profiles, in unique ways. In the next sections, we explore the stand-alone effect of each event, and what the combined effect of both events will be on Bitcoin’s price equilibrium.
The Demand Shock
A spot bitcoin ETF will make bitcoin easier to purchase for several cohorts of investors. In other words, it will increase the demand for bitcoin. This section dives into why and how.
Currently, there are more than 10 filings of companies waiting for approval to launch a spot bitcoin ETF in the U.S. market. The notable applicant is Blackrock, the world’s largest asset manager. The earliest any one of these applications could be approved is January 2024, and all signs are pointing towards a positive outcome.
Last week, the SEC decided not to appeal a recent loss against Grayscale’s application to turn GBTC into a spot bitcoin ETF, boosting the probabilities that it would soon start approving spot bitcoin ETF applications.
Furthermore, last week the SEC greenlit several Ethereum Futures-based ETFs, meaning that the alternative path - of the SEC retracting its approvals for all previous bitcoin futures and ethereum futures ETFs, seems nearly impossible at this point.
Why would the bitcoin ETF increase the demand for bitcoin? The answer is “access”.
The first cohort to benefit will be larger institutions that want long-term exposure to the asset, and do not want to do so through a futures-based bitcoin ETF (which already exists). As many of you know, futures-based ETFs are less-than-ideal long-term investment vehicles (due to the time and value decay of constantly rolling futures contracts). Sophisticated investors much prefer spot-based ETFs for long term price exposure.
The second cohort to benefit will be investors that have large retirement investment funds, and similarly, wanted to have long-term price exposure to bitcoin, but did not want to do so through a futures-based ETF.
The combined effect is that two very large investor cohorts will now have access to purchase bitcoin.
So, how does this impact Bitcoin’s supply and demand equilibrium? It increases demand -shifting the demand curve further to the right.
If we held all other variables constant, an increase in demand - by itself, would result in a higher equilibrium price for Bitcoin.
We got a taste of this spike in demand and interest last week, when bitcoin soared >10% after Cointelegraph incorrectly reported that an ETF had been approved.
The Supply Shock
Every four years (approximately), the bitcoin network programmatically cuts the amount of bitcoin rewards it pays miners in half. This event typically shocks the market, as miners often operate on thin margins and have to sell the bitcoin they produce.
Using the upcoming halving as an example, currently, miners receive ~27,375 BTC/month as rewards. Post-halving, they will earn 13,687.5 BTC/month. At $28,000/BTC, that’s a drop in revenues of $383 Million/month.
As we covered, the Bitcoin halving is a supply shock - as less bitcoins are available for miners to sell. Let’s see what that looks like on a graph:
Less supply shifts the supply curve further to the left, and results in a higher equilibrium price for bitcoin.
The next bitcoin halving is tentatively scheduled for April of 2024.
Combined Dual Shock Effect
With the Bitcoin spot ETF approval tentatively happening on or before March 2024, and the Bitcoin halving programmed to kick in soon thereafter, let’s look at the combined impact of both events on bitcoin - from a theoretical perspective:
Following economic first principles, and most importantly - common sense, the combined impact of both events, all other variables held constant, would result in a higher price for bitcoin.
Relative setups, relative flows
The Supply and Demand curves above can be explained by human incentives.
Investors and portfolio managers have incentives too!
Below is a list of the top 14 assets in the world by market capitalization:
If you are an investor looking to protect your savings, you will be considering one or more of these assets to add to your portfolio. (Note: this chart does not include U.S. Treasury Bonds, which are $25 Trillion in market cap - or twice the size of gold. U.S. Treasury bonds can be assumed to be the “risk free” rate that the assets on the chart should look to outperform).
Going through the list, a few things stand out:
First, there is not a single other asset that is poised to experience a positive increase in demand, and a negative shock to its supply in 2024.
Second, at its current price, Bitcoin’s market capitalization is less than half that of Silver, less than 5% of the market capitalization of gold - and ~2.6% that of U.S. Treasury bonds. So the marginal effect of repositioning from one to the other vastly favours bitcoin.
Third, once the Blackrock, Fidelity, Franklin Templeton, and other Bitcoin ETFs are approved, they will all begin competing for volumes. This means that part of their enormous marketing budgets will be allocated to their Bitcoin ETFs. In other words, get ready for bitcoin content in financial news networks, and even TV/print/radio advertisements to retail consumers.
Think of the Grayscale “Drop Gold, Buy Bitcoin” TV ad that ran to promote GBTC back in 2019, but on steroids, and times three (or more). Not to mention the endless amounts of talking heads on TV and analyst reports on bitcoin.
This dual shock value proposition for bitcoin will certainly peak the interest of investors from far and wide. The relative values between bitcoin, gold, and U.S. Treasuries are such that even a small movement of capital from Gold or Treasuries to Bitcoin would have a material effect on bitcoin’s price.
Amid all of the negative narratives and uncertainty heading into 2024, bitcoin remains a bright spot for investors, and for humanity.
Hodl.
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