On the back of our note to our investors earlier in the week, BTC ETFs are proving to be one of the most successful ETF product launches in history, with the total FUM for the new 9 products sitting just below $16Bn (as of 29 Feb data). The current daily demand for Bitcoin via ETFs far outweighs new issuance, pushing BTC prices above previous all-time highs against a number of currencies, including the Aussie dollar and Japanese Yen.
Bitcoin's upcoming halving event will exacerbate this supply/demand dynamic, leading us to believe it will be a further catalyst for price appreciation over the medium to long term. The halving is earmarked to take place late April 2024 and has historically driven each of Bitcoins' previous bull cycles. Whilst there has been a significant rally, several metrics show this is still far from a full FOMO-driven market – as GMI co-founder Raoul Pal highlighted on X, of Coinbase’s 100m+ customers, only 10m is currently active. Google search volume for crypto-related queries is still comparatively low, and on-chain metrics are far off their usual bull market peaks.
Speculation of ETH being the next ETF domino to fall has led to strong rallies across Ethereum and related tokens, and further network upgrades have the potential to increase network activity – more on that later.
Bitcoin Halving Overview
From our previous halving note April last year:
"Bitcoin’s halving cycle is a term that refers to the reduction of block rewards for those participating in mining. Bitcoins halving occurs every 210,000 blocks [circa. 4 years] resulting in a 50% reduction in the prevailing block reward. At present, each new block mined [every ~10 minutes] receives 6.25 BTC, and following the upcoming halving during April of 2024, new Bitcoin emissions will be reduced to 3.125 BTC per block mined."
Block rewards are made up of the newly issued bitcoins as well as fees from the transactions within that block and play a crucial role in maintaining the security of the Bitcoin network.
Bitcoin has experienced 3 halvings since its creation, moving from the initial 50 BTC block reward to its current 6.25 level, with over 96% of Bitcoin’s terminal 21 million supply already mined.
Source: Dune Analytics
Throughout its history, the Bitcoin network’s block reward has attracted more than enough security, creating a highly competitive mining market.
However, the longevity of Bitcoins security model has been a contested topic with concern that the diminishing reward of newly issued coins will not attract an appropriate level of computing power to protect the (assumed) increasing value of the network over time.
Recent increases in transaction volumes and network activity thanks to the proliferation of Ordinals, BRC20 tokens and Layer 2s bringing smart contract functionality to Bitcoin, show a glimpse at a potential solution to this dilemma, where base layer fees make up an increasing percentage of block rewards to continue to attract sufficient security.
Source: Dune Analytics
Halvings impact on price
Given that the halving is hard coded and widely known, there is debate as to whether the supply constriction drives prices higher given efficient market hypothesis would suggest the event is priced in. However, we believe that the event undoubtedly will impacts price – even if demand remains steady and new issuance is halved, price will likely push higher to find the new market equilibrium. A look at historical halvings supports this relationship, and whilst we acknowledge historical data is no guarantee of future outcomes, we believe this year's supply halving will be a bullish catalyst as we expect demand to continue to grow and track an S curve adoption like other new technologies. The below chart from crypto VC firm Pantera shows historical rallies pre- and post-halvings (along with their previous estimate for this cycles all-time high).
Source: Pantera
With each halving having less impact in terms of the number of new coins issued vs circulating supply, we have observed diminishing returns over each cycle especially as the asset matures (also highlighted in Pantera’s chart above). However, with the successful launch of the spot ETFs, as well as the potential for Bitcoin to capture more and more value from smart contract networks, there is a possibility this cycle breaks the diminishing return thesis. As highlighted below, Bitcoin has never been this close to previous all-time highs before a halving.
Source: Dune Analytics
BTC ETF Flows
Throughout February we’ve seen strong inflows to the newly listed spot BTC ETF products, and withdrawals from the long-standing, comparatively high fee GBTC had slowed (noting fresh data for the 29 Feb trading session showed the second highest day of GBTC outflows of ~$600m – somewhat expected as Genesis liquidates holdings). Inflows propelled Bitcoin throughout the month, and we expect strong flows to continue throughout the year as more wealth managers and platforms open access to these new products – Wells Fargo and BoA’s Merrill Lynch the latest groups to open access. It is fair to say the ETF launch was one of the most successful in history, demonstrating the pent-up demand from this previously untapped channel.
Source: Farside. *The above shows GBTC outflows for 29 Feb. Inflow data for new ETFs still pending at the time of writing
Long-Term Holder Supply
Another important factor alongside ETF flows is the all-time high levels of supply held by long-term holders (LTHs), especially at this relative point in time in the halving cycle. Supply held by LTHs hit all-time highs in late 2023, and whilst there has been some (expected) distribution from this cohort given recent rallies, the level of BTC supply held by holders who are statistically less likely to sell is at near all-time highs at this point in a halving cycle.
Source: Galaxy Research
The 12-18 months after a halving event are generally characterised by hype and euphoria, attracting new participants as the flywheel of price appreciation > further interest/adoption > price appreciation drives Bitcoin to new highs. We are closely following the new demand via ETFs as well as the flurry of development on the Bitcoin network as a point of difference this cycle. Alongside potential interest rate cuts this year, this cycle has the potential to push Bitcoin adoption further and more widespread, leaving us to ask our readers – are you comfortable with your current Bitcoin exposure?
ETH ETF Speculation
Ethereum was somewhat unloved in 2023, trailing Bitcoin which outperformed on the back of ETF speculation and losing out to the popularity of other Layer-1s such as Solana and Avalanche which surged from their 2022 lows. However, with a successful launch of BTC ETFs now cemented, speculation has moved to the eventual approval of an ETH ETF. This narrative, alongside continued technical network developments, has led to ETH performing strongly throughout February, with ETH/BTC up near 2% MoM.
We by no means believe that ETH is simply the next ETF domino to fall, acknowledging the long and complex route of BTC ETF approvals which ultimately came after a successful hearing against the SEC. However, many of the world's largest asset managers, including BlackRock, are betting on eventual approval. We have seen expected delays to applications this year, however, the key date in focus is the final deadline for VanEck’s application - 23 May 2024.
The SEC's stance on the asset remains unclear, and there are questions as to whether an ETH ETF would allow for assets to be staked, potentially adding delays to the approval process. Many have argued that if PoS assets are unable to be staked within an ETF wrapper, these products would be inferior to buying and staking ETH yourself or using an active manager that can stake these assets on your behalf – like our flagship Digital Asset Fund.
Ethereum Upgrades
The next big upgrade for the leading smart contract network is Dencun which is slated for mid-March. The hard fork will see multiple Ethereum Improvement Proposals (EIPs) go live, mainly focused on improving throughput and reducing transaction costs for Ethereum Layer-2 (L2) solutions.
We believe these upgrades will help rejuvenate the Ethereum network which has seemingly suffered as low-cost, high-throughput competitors attracted a lot of network activity away from Ethereum. Ethereum possesses many benefits over these competitors (the below graph highlights the magnitude of fees “earnt” by the Ethereum network compared to peers), and if L2s can match the throughput and costs of more centralised competitors, Ethereum is well-positioned to capture further network development and activity.
Source: Token Terminal
Whilst Bitcoin has dominated on the back of the ETFs, we believe Ethereum’s tailwinds are many:
Potential ETH ETF approvals this year – we’ve seen the impact of approvals on BTC price
Dencum upgrade allowing L2s to better compete with more centralised, faster/cheaper L1s
The amount of ETH locked up in network staking continues to grow
Since the Merge, ETH supply has been net deflationary, and with the heightened activity that usually occurs during bull markets, this trend is likely to continue if not increase
With a 6 year track record, Trovio is your trusted partner in navigating digital asset markets. To learn more about our long only and market neutral products, reach out via investor.relations@trovio.io.
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