Evening Brief – 02.29.24
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Can anything stop the ferocious rally in Bitcoin? The digital currency is up 40% this year, eclipsing $63,000 on Wednesday before pulling back a bit today, and on track to surpass its all-time high of $69,000 reached in November 2021.
“Bitcoin is on an 18-month path to $150,000, led by unprecedented institutional adoption,” Bernstein analysts led by Gautam Chhugani said in a note to clients this week.
The general response is that Bitcoin spot ETFs have resulted in increased demand for the asset. BlackRock, Fidelity Investments, and other financial institutions approved ETFs in January, which has helped inject billions of dollars into the crypto markets.
When the flow of capital is priced in Bitcoin, that equates to 9,510 Bitcoin in net inflows. To put this in context, the Bitcoin network generates 900 net new Bitcoins per day. As a result, the demand for the asset exceeds the network’s daily production capacity by more than 10 times, according to Bitmex, a crypto exchange and derivative trading platform.
“That imbalance of supply and demand would not be shocking if evaluating it during the first few days of the ETF launch. But we are now more than six weeks after the launch, so the 10x demand imbalance is mind-boggling,” wrote Anthony Pompliano, of The Pomp Letter.
Since their introduction, the ETFs have received more than $6 billion in cumulative net inflows, according to Bitmex. Blackrock’s fund is the market leader with $7.2 billion in assets, and there are five ETFs with at least $1 billion in assets under management.
Pompliano went on to write about an interesting correlation between the price of Bitcoin and inflation. “Bitcoin’s price was around $8,000 during the summer of 2020 and inflation was under 2%. By March 2021, Bitcoin was trading at $64,000. Investors saw that inflation was coming, so they began buying Bitcoin hand-over-fist. They wanted to be protected when inflation arrived,” he wrote in his blogpost.
Fast forward to today and Pompliano believes there is a “strong argument” that investors are hoarding the asset for the same reason. While inflation (CPI) has fallen considerably since its peak in June 2021 at 9.1%, the past few readings, along with other closely watched inflation indicators, have signaled the road to the Fed’s 2% objective will be elusive.
“Don’t buy the narrative that this rally is only tied to some speculative interest from large capital allocators, warned Pompliano. “There is a big risk of inflation lurking in the dark corners of the economy.”