Bitcoin Liquidity Crisis Incoming? Bitcoin ETF Demand Surges And New All-Time Highs

Bitcoin has been on a tear in 2024. Over the past several weeks, the token has reached multiple new highs. While many factors have contributed to this buying pattern, one of the more interesting elements of the recent run is the approval of spot Bitcoin exchange-traded funds (ETFs). 

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The ETFs began trading on Jan. 10 after months of negotiations and meetings. The release of the funds brought in a whole new host of investors, which forced the ETF sponsors to continue buying Bitcoin to meet the demand. For example, Bank of America Corp.'s Merrill division and Wells Fargo& Co. recently allowed their wealth management clients to buy the ETFs. 

These new investors have caused the ETFs to engage in consistent and growing buying activity since January. BlackRock's ETF (IBIT) has seen over $10 billion in net inflows since launching. This means that BlackRock has bought over $10 billion worth of Bitcoin in the last two months, partially contributing to the meteoric rise in price. 

All of the funds have seen positive net inflows since launch except the Grayscale Bitcoin Trust (GBTC), which was converted from a futures-linked ETF into a spot ETF. This ETF has seen over $10 billion of net outflows since launch, mostly because of the arbitrage opportunities that were available and its high fees. However, across all spot ETFs, there have been net inflows of nearly $10 billion. Many are considering the launch to be the most successful first two months for any ETF in history.

While this may not seem like a lot in terms of the total volume for Bitcoin, it could be large enough to tip the balance between buyers and sellers. Additionally, the rate of buying is speeding up for IBIT and other ETFs, while the outflows for GBTC are slowing. According to CryptoQuant Founder Ki Young Ju, if this trend continues, "We'll see a sell-side liquidity crisis within six months." 

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A sell-side liquidity crisis would mean that there are not enough sellers to suppress the price of Bitcoin. This could send the price soaring. According to Ju, this could mean that the "cyclical top may exceed our expectations due to limited sell-side liquidity and thin orderbook." The driving force behind this is mining wallets accumulating and holding their tokens, effectively decreasing the amount of tradeable supply.

Another important topic to consider is the upcoming Bitcoin halving. This event, expected to occur in April, will lower the amount of Bitcoin that is mined by half. So, the total amount of Bitcoins mined each day will go from around 900 to 450. This could create less selling pressure, as the miners are theoretically selling less BTC each day. However, some believe that the recent run in Bitcoin is the market pricing this in, and the event could have little to no effect on the price of Bitcoin. 

With Bitcoin booming, this could be an inflection point. Sellers could either see this as an opportunity to dump some of their tokens before the halving, or a sell-side liquidity crisis could send Bitcoin to new heights.

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