On Wednesday, March 13, Bitcoin surged to $73,000, surpassing its previous all-time high set in November 2021. The current bullish trend has been predominantly driven by the influx of BTC ETFs. This year’s upward trend could also be potentially influenced by speculation surrounding the forthcoming Bitcoin halving and the election year, both factors which traditionally have had a positive impact on the market.
However, despite recently surpassing $73,000, Bitcoin is encountering difficulty in sustaining the levels it saw last week at the time of writing. Furthermore, recent research shows that with Bitcoin’s limited supply, price discovery relies heavily on existing holder behavior and demand rather than a simple change in supply. In other words, the perceived fair value of Bitcoin by current holders may carry greater importance than speculative opinions.
This article delves into the dynamics driving Bitcoin’s recent price movements, explores the concept of price discovery, and analyzes the behavior of Bitcoin holders and its implications for the market.
Bitcoin ETFs
Business Insider reported on March 18 that crypto fund inflows have exceeded the total seen throughout 2021, reaching $13.2 billion compared to the previous year’s $10.6 billion. The surge is attributed to the introduction of spot Bitcoin ETFs in January, sparking significant investor interest. Last week, a record $2.9 billion flowed into digital asset investment products, surpassing the prior week’s $2.7 billion.
With Bitcoin’s 54% increase this year, investor interest grows ahead of the upcoming halving event expected in April, prompting speculation of an “explosive set-up.”
What is price discovery?
Price discovery refers to the process of determining the fair price of an asset through buyer-seller interactions, considering various factors such as supply, demand, and economic conditions. Essentially, it’s the point at which agreement is reached between buyers and sellers, leading to a transaction.
In any market, whether financial or local, price discovery is crucial. It involves the convergence of buyers and sellers, each with distinct motivations and trading styles. Market dynamics, influenced by factors like market structure and available information, continuously shape price discovery, allowing you to adjust your strategy based on changing conditions. This ongoing process is driven by the interaction of buyers and sellers, with new information constantly impacting market sentiment and prices.
Understanding price discovery is vital for you as it reflects the balance of supply and demand in financial markets. By assessing whether an asset’s price is fair and whether it’s overbought or oversold, you can make informed decisions on when to enter or exit positions. Ultimately, price discovery serves as a mechanism for determining asset prices, driven by the constant interplay of market participants and evolving market conditions.
Bitcoin’s price discovery
Spot ETF inflows have consistently reflected the demand for Bitcoin from investors. Whether embraced or not, Bitcoin serves as the primary leader and gauge of market sentiment. The investment has not yet reached a state where its price behavior is predictable compared to other asset classes, and this phenomenon is referred to as price discovery.
Calligraphy Digital, a group of quantitative analysts, examined Bitcoin and suggested that as it gains broader acceptance and experiences reduced volatility alongside price stabilization, institutional investors may add to their positions. This progression is poised to advance the process of price discovery.
The analysts also pointed out that $100 million flowing into a market with limited supply when Bitcoin is priced at $1 million presents a vastly different scenario than when Bitcoin is at $10,000. It is the movement of coins within the system — rather than dollar flows — that holds significance for price discovery.
Furthermore, given that Bitcoin possesses a predetermined supply, price discovery is largely dictated by existing holder behavior and demand versus fluctuations in supply. With only 21 million Bitcoins in existence and approximately 19.6 million already mined, there are 1.4 million left to be mined.
Bitcoin supply & behavior analysis
They speculated that if MicroStrategy decided to sell their holdings, it could potentially trigger a significant market downturn. Yet, such an event would be driven by sentiment rather than a fundamental change in supply. Calligraphy Digital estimates that institutional holdings are relatively insignificant compared to the total circulating supply of 19.6 million coins.
However, concerns regarding concentrated holders flooding the market with supply are valid, especially if this action is coordinated. The analysts stated that the key question revolves around when these concentrated holders may be motivated to sell and how this motivation intersects with ETF demand. Analyzing the distribution of Bitcoin across entities reveals that approximately 23% of the supply is controlled by entities with 100,000 Bitcoins or more, with another 9% held by entities possessing 10,000 to 100,000 Bitcoins. Entities classified as ‘whales’, holding more than 1,000 Bitcoins, total around 1,584.
According to the data presented, 1,584 entities collectively hold 48.8% of the total 19.6 million Bitcoin supply. Approximately 23% of the supply, equivalent to about 4.5 million Bitcoin, is controlled by entities with holdings exceeding 100,000 coins, which theoretically could be represented by as few as 44 entities.
Notably, older coins between 5-7 years have begun entering the market to sell for the first time, a move potentially signaling a resurgence in coin supply. Long-term holders are transferring approximately 13,000 coins per day to exchanges with a possible intention to sell. Over a rolling 30-day period, an estimated 300,000 coins from long-term holders are being introduced into the market. Yet, the sell-side pressure has been relatively low.
You can review the full institutional holding of Bitcoin here.
In closing
Calligraphy Digital noted that as large Bitcoin holders begin to sell their holdings, and thus increase the supply, they expect institutional investors to increasingly adopt Bitcoin as a store of value or inflation hedge. This shift is anticipated to drive a self-reinforcing cycle of price changes, leading to the eventual determination of Bitcoin’s true value.
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