Digital Nugget: Bitcoin’s drivers post-halving

The price of Bitcoin has more than quadrupled since the low of the last bear market in November 2022. Despite the significant rise, the potential for further strong performance remains with a number of positive drivers in place.

Net inflows into Bitcoin ETFs

Source: Farside Investors

1. Demand for Bitcoin ETFs

The net inflows into the newly launched Bitcoin ETFs surprised substantially to the upside already, even though many brokerage and advisory platforms are yet to authorise the product for their clients, and those that offer them tend to report that only a very small percentage of clients have traded them so far (“early adopters”). The expectation is that demand will continue gradually ramping up over the next 1-1.5 years. The recently approved Bitcoin ETFs in Hong Kong will bring additional demand from Asian investors.

2. Legitimisation of crypto

The involvement of the world’s largest traditional financial institutions has credentialised Bitcoin. This is further supported by the narrative from influential figures such as Larry Fink, Bill Miller, and others that investment in Bitcoin is a “flight to quality” with “long term viability” or an ”insurance against financial catastrophe”, leading to further demand not just for the new ETFs but for Bitcoin spot, derivatives, and other investment products.

3. Institutional allocations

Asset management firms have started allocating to the crypto asset class, carving out a place for it in portfolios. We have seen announcements from Fidelity, Franklin Templeton, BlackRock as well as some of the world’s largest pension funds. This trend is only just the beginning and has the potential to drive tremendous demand, considering the approx. $120tr AUM of the global asset management industry.

4. The halving has made Bitcoin the hardest asset

Before the halving, Bitcoin’s stock-to-flow (a metric that measures the scarcity of a commodity) was similar to that of gold but it is now substantially better, making Bitcoin the hardest asset. There is a compelling case for diversifying safe haven holdings across Bitcoin and precious metals, and we have already seen some rotation from gold to Bitcoin.

5. Macro fragility creating demand for safe haven assets

Frequent reminders of the fragile global macroeconomic and geopolitical situation continue to encourage inflows into safe haven assets, including into Bitcoin. The European economies are flatlining, the US economy is fuelled by government debt growing by $1tr every 100 days and by households running down their savings and running up credit card debt, while the escalating government debt is not directed towards productive uses with most of it going to defence, interest payments, and social and healthcare benefits (as well as waste and fraud) and is therefore inherently inflationary. Meanwhile the shifting world order and dedollarisation create instability, while political tensions continue escalating. Against this backdrop the demand for safe haven assets continues to grow.

6. Revived innovation on the Bitcoin network

Since early 2023, we have seen a high level of innovation on the Bitcoin network, including the launch of new token types (e.g. Ordinals inscriptions i.e. “Bitcoin NFTs”), layer 2 scalability solutions, initiatives for Bitcoin liquid staking and using Bitcoin in shared security solutions. This is attracting developers to the protocol and the new products and applications increase Bitcoin’s potential for value generation.

7. Substantial growth in onchain activity

The level of innovation and new product launches have also led to a significant growth in transaction volumes and in transaction fees earned. This not only increases Bitcoin’s fundamental value, but the rise in miner revenues from transaction fees also provides comfort as the halving reduces miners’ block rewards.

8. High conviction among long term holders

The share of long-term holders unwilling to sell as they remain convinced of Bitcoin’s potential remains near all-time highs despite a small degree of profit taking after Bitcoin reached new all-time highs. This means that the newly catalysed demand for Bitcoin is met by very limited liquid supply, creating demand shocks.

9. Rate cuts the icing on the cake

Although recent signals from the Federal Reserve have pushed rate cut expectations further out, it nonetheless still appears that we have reached the end of the hiking cycle. Although Bitcoin’s fundamentals aren’t negatively affected by heightened macro risks, and its correlation with other asset classes is very low, easier liquidity conditions would benefit all financial assets, including Bitcoin. At a time when a large number of new investors, both institutional and retail, are considering an investment in Bitcoin, easier monetary conditions would further accelerate this new demand.

10. Bitcoin’s energy use still a concern

Bitcoin’s proof-of-work consensus mechanism is highly energy intensive. This is in contrast to more computationally efficient blockchains, especially those using the proof- of-stake consensus mechanism. This means that scarcity and rising energy costs put pressure on Bitcoin miners’ profitability. Beyond that, the Bitcoin network’s high energy consumption is a concern for governments and regulators. A recent US regulatory initiative to survey Bitcoin’s energy use was shelved due to pushback, taking a negative driver off the agenda for now, however, the concern over Bitcoin’s energy consumption remains until and unless technological advances alleviate the issue.

Read more about crypto assets from Sygnum here.

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