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The new market frenzy surrounding Bitcoin (BTC-USD) is driven by the basic laws of economics: supply and demand.
On average, more Bitcoins are purchased each day than new coins are created.
One big reason for this imbalance is the investment appetite generated by a series of U.S.-listed Bitcoin exchange-traded funds that were approved by the Securities and Exchange Commission in January and attracted significant new investor capital last month. be.
Since early February, these products have been buying an average of 3,500 to 4,300 coins each day, according to three analysts working for the cryptocurrency manager.
This is significantly more than the 900 coins created daily by the Bitcoin network over the same period.
“There is not enough Bitcoin to meet all the new demand, so the natural supply and demand relationship is driving the price up,” said Zach Pandle, head of research at Grayscale Investments. .
On Thursday, Bitcoin broke above $63,000, putting it within striking distance of its all-time high of $69,000, set in November 2021.
It is on track to end February up 42%, its best monthly performance since December 2020.
“halved”
A planned “halving” in two months could cause further supply problems.
When Bitcoin was created by anonymous software programmer Satoshi Nakamoto in 2009, it was programmed with a fixed supply schedule that meant it would be halved every four years.
After the next cut, the so-called “halving”, the daily supply of new coins will be 450 instead of 900.
If that happens, prices may rise.
“We are potentially in the best spot here,” Mark Connors, head of research at crypto asset management firm 3iQ, told Yahoo Finance. “We can’t produce more Bitcoin to meet demand.”
Connor’s company, 3iQ, has set a medium-high price target for Bitcoin this year between $160,000 and $180,000. Next year, a staggering target of $350,000 to $450,000 per coin is expected.
Another money manager, Van Eck, set a 2024 price target for Bitcoin last quarter at $80,000.
“These estimates are certainly a little outdated now,” said Matthew Siegel, head of digital asset research at VanEck.
“Pure speculative demand”
There are certainly other factors at play in the current supply crunch besides demand from ETFs.
As an example, according to blockchain analysis platform Arcam Intelligence, the US government currently holds 215,000 BTC, including items seized from various seizures, including the 2016 hack of cryptocurrency exchange Bitfinex. include.
The fact that it is currently only being held and not sold is constraining supply. But that could change if the government needs to distribute some of it to victims, which could mean a sale.
Another large holder and buyer at the moment is MicroStrategy (MSTR), which announced on Monday morning that it had acquired an additional 3,000 BTC. This brings the total investment to 193,000 BTC, with a value of more than $11.8 billion as of Wednesday.
VanEck’s Siegel said that as asset prices rise, many institutional investors need to take profits to keep their portfolios balanced. This could change the imbalance between supply and demand.
It’s also certain that less fundamental, more psychological factors are driving this new rise, such as fear of missing out (FOMO).
“This is certainly a sign of risk appetite,” Sam Stovall, chief research investment strategist at CFRA, told Yahoo Finance Live.
Eric Rosengren, former president and CEO of the Boston Fed, said ETFs have “made it much easier to own Bitcoin, especially for non-technical investors.”
“It doesn’t change the basic, fundamental facts; [bitcoin] It is pure speculative demand since it does not generate profits. ”
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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