Over the week from February 24 to March 1, 30,029 bitcoins were purchased by ETF funds, compared to 6,160 new bitcoins produced by miners. What are the consequences of such a gap? What negative consequences might it have? And how much worse could the situation get after the halving event?
A significant gap between supply and demand for bitcoin could have several adverse consequences:
1. If the current level of supply and demand remains the same, the price of bitcoin will continue to rise, as there are increasingly fewer coins on the market. This could make BTC less affordable to retail investors and slow its adoption as a means of payment.
2. High demand and limited supply could stoke price swings. Any significant movements in the market would have a more pronounced effect due to the scarcity of bitcoins in circulation.
3. If demand continues to outpace supply, a price bubble may form in the BTC market. Such bubbles have historically ended with a sharp price collapse after reaching a peak. This is why many people call their bitcoin targets around $1 mln.
The situation might get worse after the upcoming halving event, when miners' block reward will be reduced from 6.25 BTC to 3.125 BTC. This will significantly curb the supply of new bitcoins and could trigger further price increases while demand remains high.
To mitigate the negative consequences, there should be a reduction in demand from institutional investors. Otherwise, there is a high probability of a price bubble forming and then a flash crash. The current rally could delay the approval process for spot Ether ETFs indefinitely.