Graphing Digital Assets
Month in Review — February 2024
Economics 101: Supply vs. Demand
The price of bitcoin soared in February, increasing 43.8% from $42,548 to $61,179. Rising demand resulted in bitcoin being bought at a rate that outpaced the new supply being created, driving up the price substantially.
From January 11th, when U.S. spot bitcoin ETFs began trading, through the end of February, these investment products acquired an approximate net 150,145 BTC (331,136 BTC bought minus 180,991 BTC in outflows from GBTC). During this same time, approximately 45,000 new BTC were mined – more than two-thirds of the net BTC bought by these ETFs were purchased from the already circulating supply (top graph).
Adding to the imbalance between bitcoin supply and demand, the amount of BTC held on centralized exchanges and available for trading decreased in February as the price of BTC increased (bottom graph). This bullish indicator depicts investors’ increased interest in holding their BTC off-exchange rather than selling. When the circulating supply of BTC available for purchase decreases as demand increases, this can result in sudden, large price spikes with the price becoming more sensitive to changes in demand.
As bitcoin demand continues to outpace its supply, particularly in light of the halving anticipated in April, we turn to the most basic rule of economics. Considering substantial demand is still yet to come from institutional investors and RIAs, especially for U.S. spot bitcoin ETFs, we expect the price of BTC to greatly increase this year.
Sources: Samara Alpha Management; Coinglass as of February 29, 2024.
ETH - Not To Be Ignored
While recent media attention has been centered on bitcoin, institutional investors have been turning their attention towards ether. ETH growth outpaced bitcoin, increasing 46.5% in February, from $2,282 to $3,342, versus BTC’s +43.8%.
In February, Bybit published a report that showed institutional allocations to crypto assets as of January 31st favored ether (39.82%) with bitcoin at a close second (39.49%), as seen in the top graph. This is more than double institutions’ allocation to ETH last September (bottom graph).
Let’s examine possible drivers of increased institutional allocations to ether:
1. The upcoming Ethereum network upgrade: On March 13th, the Ethereum Cancun-Deneb ("Dencun") hard fork upgrade is set to be deployed on the Ethereum mainnet, designed to improve the scalability, efficiency, and security of the network. The upgrade is expected to act as a positive catalyst for ETH. Read more here.
2. Spot ETH ETF approvals: There are currently eight applications for spot ETH ETFs in the U.S., among them applications from BlackRock and Fidelity, with the SEC's first decision deadline approaching in May. As with the U.S. spot bitcoin ETF approvals, investors expect this to lead to a similar positive price movement for ETH.
3. Historical ETH volatility: ETH has historically demonstrated greater volatility than BTC, with higher highs and lower lows during extreme market cycles. Given the bullish sentiment among traders, institutions may see especially favorable upside potential as the market is anticipated to move in a positive direction.
While there is not enough data to determine whether the increased allocations to ether is a long-term trend, its strong performance is noteworthy and we expect to see an upward trend in the months to come.
Source: Bybit
The Fate of the Miners
In April, the Bitcoin network will undergo its fourth halving event. The halving will cut miner rewards from 6.25 BTC to 3.125 BTC per block. This reduction in rewards will impact miners' profitability, as they face increased competition and higher operational costs, potentially leading to consolidation within the mining sector. Galaxy analysts predict that as much as 20% of Bitcoin’s current hashrate could go offline following the event.
The impending supply shock has fueled competition among miners. To prepare, they are making significant efforts to purchase the most advanced mining rigs in an effort to increase their hashrates, as well as cutting many costs to make their operations more efficient and profitable.
Increased miner competition is affecting the entire network. The total bitcoin hashrate has more than doubled over the past year, increasing by nearly 36 EH/s in February. As a result, bitcoin mining difficulty has increased, surging to a new high of 81.73 trillion on February 16th from 70.3 trillion at the end of January (top graph).
Heightened bitcoin mining difficulty favors firms with the most advanced mining equipment. In reponse, miners have been taking advantage of high BTC prices, selling their reserves (bottom graph), likely to fund efforts to increase the efficiency of their operations prior to the halving.
Large Bitcoin mining companies are taking action to expand their hashrate. Riot Platforms purchased $291 million in new BTC mining rigs in December 2023 and an additional $97.4 million in new rigs in February. CleanSpark successfully acquired three new data centers in Mississippi in February, with initial operations boosting their hashrate to over 15 EH/s.
We expect to see strong selling pressure from miners leading up to the halving, as well as shortly after the halving when some miners will be forced out of business. Traders speculate this will lead to a decline in BTC price for a brief period leading up to and following the halving event, prior to the anticipated post-halving surge.
Sources: Samara Alpha Management; Blockchain.com; Cryptoquant as of February 29, 2024.