Ethereum Outperforms As Bitcoin Soars; Goldman Notes ETFs Dominating Flows As Liquidity Improves

The total market cap of cryptocurrencies topped $2 trillion overnight for the first time since April 2022…

Source: CoinMarketCap

Bitcoin has extended recent gains this morning, within pennies of touching $53,000 for the first time since Dec 2021…

Source: Bloomberg

…as ETF inflows continue to dominate price action…

Source: Bloomberg

And while, Bitcoin is now the 10th largest asset in the world, Ethereum is rapidly catching up (now 33rd), having overtaken Tencent, Oracle, and Chevron in recent days as ETH comes with inches of $3,000 (erasing all of 2022’s ‘existential’ threat losses)…

Source: Bloomberg

Anticipation of an ETH spot ETF is likely driving some of this action (as we saw into the BTC ETF launch)…

Source: Bloomberg

Additionally, as Coindesk predicted in December, the U.S.-based spot bitcoin ETFs approved in January are impacting not only the cryptocurrency’s price, but also order book liquidity, or the ability to trade at stable prices.

These effects are increasingly evident a month after the nearly a dozen ETFs began trading.

Early Tuesday, bitcoin’s 2% market depth across 33 centralized exchanges, or the combined value of buy and sell orders within 2% of the market price, rose to $539 million. That’s the highest since October and a roughly 30% increase since the spot ETFs hit the market on Jan. 11, according to data tracked by Paris-based Kaiko.

The greater the market depth or liquidity, the easier it is to buy and sell large quantities without affecting prices, and the lesser the slippage, the difference between the prices at which trades are quoted and executed.

And while liquidity is improving, Goldman Sachs’ crypto queen Dominika Nestercova takes a deeper dive into bitcoin supply-demand dynamics, highlighting that:

93.5% of the total future BTC supply has already been mined.

Spot BTC ETFs have amassed ~720,000 BTC to date, representing 5.4% of existing free float supply of BTC.

On average, excluding GBTC, spot BTC ETFs have been purchasing avg ~9,900 BTC daily while avg of 900 BTC is added to supply today via block rewards.

BTC holdings continue to be retail-heavy, with 74% and 17% of all BTC supply being held in addresses with balance

BTC monetary policy and upcoming Bitcoin halving

Bitcoin’s inelastic supply has again emerged at the forefront with Bitcoin halving two months away and the spot BTC ETFs absorbing some of the available supply. The key question is whether we are seeing / will see further supply squeeze and how that reflects on the current BTC price. Currently, 93.5% of the total BTC supply has already been mined, but CoinMetrics estimates that the current free float supply is only about 13mn BTC (Figure 3).

The next Bitcoin halving is estimated to occur in Apr’24 (Bloomberg) and the mining rewards will be cut in half, from 6.25 BTC per block to 3.125 BTC (Figure 1).

Figure 1: Summary of historical bitcoin halvings

Source: CoinMetrics

Bitcoin halving is part of the Bitcoin protocol’s design and is a key mechanism for controlling the supply of new BTC entering circulation, occurring every 210,000 blocks mined. By 2140, all 21mn BTC will have been mined (Figure 2).

Figure 2: Bitcoin monetary policy and future supply

Source: CoinMetrics

BTC ETFs’ impact on BTC supply

Spot BTC ETFs have amassed ~720,000 BTC to date (incl GBTC), representing 5.4% of existing free float supply of BTC. Miners currently hold about 13% of the supply (Figure 3).

On average, excluding GBTC, spot BTC ETFs have been purchasing ~9,900 BTC daily during trading days since Jan 11th.

By comparison, only 900 new bitcoins are added daily to its supply via miner rewards and only 12.1% of BTC’s free float supply is available for purchase on spot exchanges (Figure 3).

Figure 3: Select BTC supply metrics

Source: Bloomberg & CoinMetrics

*Free Float Supply is a measure of supply that excludes tokens are locked up or dormant for a long time. For example, tokens that are inactive for greater than five years, owned by company, blockchain foundation or founding team member(s) that may or may not be subject to escrows, burnt or lost, etc

BTC market availability and investor behaviour

The estimated BTC supply available on market is not fully representative of market availability, as investor profile and active supply will further influence the demand/supply dynamic.  

Majority of BTC holdings continue to be with retail, with 74% and 17% of all BTC supply being held in addresses with balance

Figure 4: BTC supply distribution by address balance

Source: CoinMetrics as of 19 February 2024. Past performance is not indicative of future results.

While inherently difficult to ascertain investor profile behind specific addresses, addresses with smaller balances are likely to belong to retail investors. As such, availability of this BTC supply will much depend on retail sentiment.

But how much of this supply is active?

Currently, 70% of existing BTC supply has not moved on-chain for at least a year (CoinMetrics). 9% of BTC supply has never moved, which most likely represents either dormant or lost BTC. Anywhere between 1-2% of BTC supply is active on daily basis (CoinMetrics). This suggests BTC being an illiquid asset. However, this figure only accounts for on-chain transactions and does not take into consideration BTC being traded on centralized order-book exchanges. On-chain data estimates by CoinMetrics indicate that that approx. 91.5% of current BTC supply is in profit.

Similarly, looking at the MVRV ratio that takes BTC market value to realized value, the ratio has been progressively increasing YTD, currently standing at 2.09, which suggests that BTC holders might be in substantial profit (Figure 5).

Figure 5: Bitcoin supply in profit and MVRV

Source: CoinMetrics

Finally, CoinTelegraph notes that BlackRock has ramped up its media advertising campaign for its recently launched spot Bitcoin exchange-traded fund (ETF), labeling the asset not as a currency but as “progress.”

In its latest advertisement, the world’s largest asset manager maintained its relatively “boring” approach to advertising its iShares Bitcoin Trust (IBIT) ETF — at least compared to its competitors.

“Bitcoin ETFs have landed,” states the yellow advertisement, showing simply a silhouette of a runway and plane. BlackRock adds the caption: “Get your share of progress.”