What the Bitcoin Halving and Bitcoin ETFs Mean for Supply and Demand

The resounding success of spot Bitcoin ETFs has been a boon for the price of Bitcoin, and its timing could not have been better. Why? The age-old principle of supply and demand. 

In April, Bitcoin will experience its next ‘halving’, an event that occurs programmatically on the Bitcoin blockchain roughly every four years. With this, Bitcoin rewards for miners, the individuals responsible for securing the Bitcoin network, will be cut in half as a way to keep inflation in check. For the newly minted ETF issuers, already riding a surge in demand since approval, this can mean a boost for Bitcoin.

Matthew Hougan, the chief investment officer for Bitwise, whose BITB ETF is among the 10 currently operating, calls the mix of supply and demand forces a "good recipe for higher prices.”

“If this demand persists, you're going to see that investors who have held Bitcoin before the ETFs agree to sell it into the ETF complex," he told Decrypt. "I think the question for investors is at what point is that?"

Bitcoin ETFs are investment products that are bought and sold like stocks, which means investors in ETFs can gain exposure to BTC without buying the digital asset on a cryptocurrency exchange or holding it directly in a crypto wallet. These products eluded the market for over a decade as the SEC dragged its feet on approving Bitcoin ETFs for fear of manipulation in the crypto market. That changed earlier this year when 10 spot Bitcoin ETFs launched at once on January 10—billions of dollars have flowed into these funds since.

Even before renewed hype around the upcoming halving, speculation around ETFs was a primary driver of Bitcoin’s 154% rise in price last year. Since the approval of the ETFs on January 10, the price has risen further by 12%, and is currently around $51,000 at the time of writing. 

Economic theory holds that prices go up when demand for a product is higher than its supply. To ward off inflation, Bitcoin is programmed to cap the number of coins available at 21 million, but the halving slows the rate at which new coins are created. At a time of looming demand pressures, this makes a case for much higher Bitcoin prices.   

Exactly how much higher the price will go is uncertain, but issuers are already expecting that it will crack previous heights, including Bitcoin’s last high price of around $69,000, which was seen in November 2021. In a report by Bitwise released prior to the the ETF launch day, analysts predicted that the halving will produce a supply crunch equivalent to a $6.2 billion reduction in Bitcoin entering the market yearly. 

Ophelia Snyder, the president of Ark Invest’s 21Shares Bitcoin spot ETF, says she is bullish about the direction of Bitcoin’s price going into the halving. Already, she said the daily demand for Bitcoin ETFs is “already significantly larger” than the projected impact of the halving. 

"The ETFs [...] are taking in more coins than the impact of the halving on daily creation of new coins,"  Snyder told Decrypt. “The ETFs are already consuming two times that daily.” 

However, the case for a higher Bitcoin price goes beyond the halving. 

Much of the demand driving up Bitcoin since the ETFs emerged has come from the retail side than the institutional one that they are designed to attract. This is expected to change over gradually as more banks, brokers and advisors complete their checks on ETFs before going in. 

There’s also the demand factors that come from outside of the United States that could play a role. 

Last week, Japan's cabinet approved a new bill that paved the way for investment funds in the country to hold crypto among their investments. In the weeks after the SEC greenlit the ETFs to operate, Hong Kong regulators also accepted their first application for a spot ETF while European investors are also reportedly eying crypto with fresh interest. 

To be sure, there remain caveats that could make the road to a supercharged Bitcoin a bumpy one. Like any asset, the same rules of supply and demand that point to higher prices can also keep them in check. 

Globally, interest rates remain elevated in the U.S. and elsewhere, putting some damper on consumer sentiment. At the same time, major markets from China to Europe are still tipping towards recession, while Japan and the United Kingdom have already entered one. If this translates into weaker consumption, Bitcoin—like any asset in a recessionary environment—will run into reduced demand. 

There are also supply-side risks as seen with the drop in Bitcoin prices last month that came with outflows from Grayscale after its conversion from a trust to an ETF. The existence of large untapped pools of Bitcoin outside the current supply also could put downward pressure on prices if released.