The countdown continues for Bitcoin’s (BTC) supply reduction event and it seems the enthusiasm for Exchange-Traded Funds (ETFs) has fast-tracked its approach. With just a few weeks remaining until the significant moment, it comes as no surprise that the reduction in supply is the main topic of discussion among crypto investors and the media. Despite the anticipated trading patterns following the event, the current market landscape is signaling the need for revised trading approaches.
Historically, the supply reduction event has been known for inducing massive fluctuations in the market. Traditionally, we would witness a drop of approximately 30%-40%, followed by a sharp surge to a new peak within an average of 480 days after the event. However, this time, the introduction of the spot Bitcoin ETF has altered the dynamics.
To forecast Bitcoin’s future price movements, a closer examination of its volatility is imperative. In recent months, as the anticipation surrounding the pre-supply reduction event builds up, we have seen expected downturns. However, these downturns have been relatively mild compared to previous cycles. This time, Bitcoin’s corrections have been modest, not exceeding 25%. In fact, the most recent downturn was only around 15% before BTC resumed its upward trajectory towards the $70,000 level.
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This less severe downturn implies a more tempered rally post-supply reduction. It is highly likely that Bitcoin will experience the customary post-supply reduction decline but will also undoubtedly reach a new peak thereafter. Expected returns will still outshine those of traditional equity investments. However, the days of witnessing over a 600% surge in prices, similar to the 2020 supply reduction, are behind us.
So, why is this occurring? Two primary factors are contributing to this scenario. Firstly, the ratio of long-term Bitcoin holders has hit a record high of approximately 14 million BTC — which represents over 70% of the total supply of 19,670,043 BTC in circulation. Over the recent months, substantial amounts of BTC have been moved from exchanges to cold storage wallets as more holders adopt a “diamond hands” mentality.
Long-term holders as a percentage of the total Bitcoin supply, 2009-2024. Source: Glassnode
However, what has notably altered market behavior is the advent of the spot Bitcoin ETF. These ETFs are absorbing more BTC from the market than miners can generate. On average, spot Bitcoin ETFs have been acquiring about 10,000 BTC daily since their launch, while miners are producing only 900 new BTC per day. This has intensified scarcity and consequently driven prices upwards.
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Critically, this trend has resulted in a significant reduction in long-term volatility since ETF investors typically have a longer-term investment outlook compared to the average crypto trader. Although there has been a recent surge in volatility heading into the supply reduction event, it remains considerably lower than the levels observed during previous similar events. Data from CoinGlass indicates that the 30-day historical BTC/USD volatility has declined from nearly 18% in April 2013 to about 4% currently. Such volatility levels are more commonly associated with traditional equity funds rather than cryptocurrency price charts.
Bitcoin price (yellow) versus Bitcoin volatility (green), April 2013 through April 2024. Source: CoinGlass
This shift is due to the entry of investors into the spot Bitcoin ETFs, who are typically retail investors and institutions that have injected trillions into S&P 500 ETFs. They serve as long-term investors, with a minimum investment horizon of three years, and base their buy/sell decisions on long-term factors like macroeconomic conditions, fundamental market shifts, and long-term growth potential.
So, how does this affect investors aiming to capitalize on the supply reduction event? They will need to adopt a more traditional equity investment mindset rather than a speculative crypto trading approach. It will be essential for them to switch from Messari to Morningstar (a global financial data provider for traditional funds) to monitor the fluctuations in assets under management of spot Bitcoin ETFs. They must closely monitor the actions of long-term holders, who now wield significant influence.
For those hoping for 600% profits, they will need to explore other avenues. Such substantial gains are unlikely to be repeated following this Bitcoin supply reduction event. However, in return, they can expect more consistent and reliable returns that won’t disproportionately impact the volatility of a balanced portfolio. For many investors, this may present a more attractive proposition than the uncertainty associated with an asset that either skyrockets or crashes.
Lucas Kiely serves as the chief investment officer for Yield App, overseeing investment portfolio allocations and spearheading the expansion of a diversified investment product range. He previously held the position of chief investment officer at Diginex Asset…
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