Bitcoin soars 44% in february on record ETF inflows

Highlights:

• Bitcoin (BTC) closed out February at +44% and thus saw its best month since December 2020
• News of large Bitcoin holdings emerged, including an additional 3000 BTC purchased by MicroStrategy,  newly disclosed holdings by Reddit and record purchases of Bitcoin ETP products.
• In the context of Craig Wright’s ongoing trial, previously unseen emails by Bitcoin creator Satoshi Nakamoto became public. 

Forecast:

The key determinants of Bitcoin’s trajectory in the coming month will remain ETF inflows and the return of retail investors. Bitcoin’s supply is highly illiquid, which could prolong the explosive rally seen in February. 

Sentiment:

After initial disappointment, the net inflows into new spot Bitcoin ETPs in the U.S. exceeded the expectations of market participants in February. Bitcoin retains its strength compared to other crypto assets at over 53% dominance. Repeated calls for an impending altseason by analysts and traders have thus not materialized. 

Analysis:

February was Bitcoin’s most performant month in over three years as the asset put in a +44% close. Two separate rallies that commenced on Feb. 6 and 24, respectively (Figure 1) were responsible for these gains and coincided with larger-than-expected inflows into the newly approved spot Bitcoin ETFs. Most notable were Feb. 13 and 28, with net inflows of 12,827 BTC and 11,533 BTC (Figure 2).

To put these figures in perspective, only 900 BTC are currently being mined daily and this emission rate will be cut in half in late April. Hence, assuming inflows of a similar order of magnitude continue and few additional sellers emerge, there remains a large upside price potential.

This relative lack of sellers is evidenced by an illiquid circulating supply. The aggregated balance of exchanges is currently at 1.8 M BTC and is trending lower, but most notably, the Bitcoin held by the OTC desks tracked by Glassnode is approaching zero (Figure 3). If OTC desks fail to source enough Bitcoin to replenish their supply, ETF purchases will put immediate pressure on the spot price in the coming weeks. Only the U.S.government’s anticipated sell offs and GBTC outflows from the Genesis bankruptcy estate could temporarily increase the BTC supply and delay this trend. 

The price gains seen so far are unusual for the pre-halving period and have led some analysts to propose that we are in a left-translated Bitcoin cycle. Historically, Bitcoin only came close to new all-time highs after the subsidy halving, but on this occasion, price action is several months ahead of schedule (Figure 4). To reconcile this observation with the usual cyclical behavior of Bitcoin, some analysts postulate that the current market cycle is left-translated. This would imply that the cycle top may already occur in 2024.

However, despite the compelling simplicity of the hypothesis, we expect that increasing institutional participation and an unprecedented macroeconomic environment for Bitcoin will change the trajectory in this cycle more profoundly than a left-shift of the chart can accommodate. Predictions of the left-translated cycle theory should thus be treated with caution.