The Madness of the Crypto Market in 2024: The Rise of Bitcoin and the Forces Behind It

In 2024, the digital encryption market is showing an unprecedented frenzy. Among many assets, Bitcoin's performance is particularly noteworthy, achieving a rise of over 50% in just the past month. What are the reasons behind this astonishing market performance? Can this madness continue? Let's delve into these questions.

The rise in asset prices usually stems from a decrease in supply and an increase in demand. We will analyze from both the supply and demand perspectives.

As Bitcoin continues to halve, the supply side's impact on its price gradually weakens, but we still need to pay attention to potential selling pressure:

Supply Side Analysis

According to the consensus mechanism, the number of newly generated Bitcoins is less than 2 million, and the issuance rate will be halved again. This means that the new selling pressure will further decrease. Observing miner accounts, which have long been maintained above 1.8 million, indicates that miners do not have a tendency for large-scale selling.

On the other hand, the number of Bitcoins held in long-term accounts continues to grow, currently at about 14.9 million coins. The actual circulating supply of Bitcoin is very limited, with a market capitalization of less than 350 billion. This also explains why a continuous daily purchase of 500 million can significantly drive up the price of Bitcoin.

Demand Side Analysis

The increase in demand comes from multiple aspects:

1. The liquidity boost brought by ETFs
2. The growth of asset value held by affluent groups
3. Financial services are more attractive than short-term investments.
4. For funds, Bitcoin may be a wrong buy but cannot be missed.
5. Bitcoin is the core of market attention.

ETF: A Unique Catalyst for the Current Bitcoin Bull Market

Bitcoin has obtained qualification to enter the traditional financial market through the SEC's ETF approval. Compliant funds can finally flow into the Bitcoin market, and in the crypto world, traditional financial funds can only flow into Bitcoin.

The deflationary characteristics of Bitcoin make it prone to strong investment booms. As long as funds continue to buy, the price will keep rising. Funds holding Bitcoin will show excellent performance, attracting more capital to enter and further driving up the price. In contrast, funds that do not hold Bitcoin face performance pressure and may even encounter capital outflows. This model has been operating for many years in the real estate sector on Wall Street.

The characteristics of Bitcoin are more suitable for this investment game. In the past month, the average net buying each trading day was less than $500 million, yet it brought more than a 50% market increase. This is just a small trading volume in the traditional financial market.

ETFs have also increased the value of Bitcoin from a liquidity perspective. The scale of global traditional finance (including real estate) reached approximately $560 trillion in 2023. This indicates that the current liquidity in traditional finance is sufficient to support such a scale of financial assets. Although the liquidity of Bitcoin is far less than that of traditional financial assets, the access to traditional finance will undoubtedly create a higher valuation space for Bitcoin. It is worth noting that this compliant liquidity can only flow to Bitcoin and cannot flow to other crypto assets. Bitcoin no longer shares the same liquidity pool with other digital encryption assets.

Higher liquidity means that assets have a higher investment value. Only assets that can be quickly liquidated can carry greater wealth. This leads to the next important point:

The Bitcoin preferred by the rich will inevitably become more expensive.

According to market research, billionaires in the cryptocurrency field usually hold a large proportion of Bitcoin during a bull market, while middle-class or lower investors typically hold no more than 1/4 of their portfolio in Bitcoin. Currently, Bitcoin accounts for 54.8% of the entire crypto market. If readers find that the proportion of people in their circle who hold Bitcoin is far below this figure, then it is likely that Bitcoin is mainly concentrated in the hands of the wealthy and institutions.

Here comes a phenomenon: the Matthew effect — the assets held by the rich tend to appreciate continuously, while the assets held by ordinary people may depreciate. Without government intervention, the market economy naturally leads to the emergence of the Matthew effect. The rich will become richer, and the poor may become poorer. This is not only because the rich may be smarter and more capable, but also because they inherently possess more resources. Smart people and useful resources and information naturally seek cooperation opportunities around these rich individuals. As long as a person's wealth is not purely obtained by luck, it can create a multiplier effect and become increasingly rich. Therefore, things that conform to the aesthetics and preferences of the rich often become more expensive, while things that conform to the aesthetics and preferences of ordinary people may become cheaper.

In the crypto market, the wealthy and institutions may use non-mainstream coins as tools to profit from ordinary investors, while using highly liquid mainstream tokens as value storage tools. Wealth may flow from ordinary investors into small-cap tokens, which are then harvested by the wealthy or institutions, and then flow back into mainstream coins like Bitcoin. As the liquidity of Bitcoin continues to increase, its appeal to the wealthy and institutions will also grow.

The price of Bitcoin is not the key; the key is whether it can capture a share of the Bitcoin financial market.

After the SEC approved the Bitcoin spot ETF, it triggered competition in the market on multiple levels. Several well-known financial institutions in the United States are vying for the leadership position of the ETF. In the global market, multiple financial centers such as Singapore, Switzerland, and Hong Kong are also following closely. There is indeed the possibility of institutions selling off Bitcoin. For the small amount of Bitcoin accumulated in the short term, if it is sold into the market, whether it can be repurchased under the current international environment remains an unknown.

Moreover, without support for Bitcoin spot ETFs, issuing institutions will not only lose fee income but also lose their influence over Bitcoin pricing. Consequently, the financial markets will also lose pricing power over this asset, which is seen as digital gold and a future cornerstone of finance, and will further lose the Bitcoin spot derivatives market. This is a strategic failure for any country and financial market.

Therefore, it is difficult for global traditional financial capital to form a conspiracy for a collective sell-off; instead, it may lead to a new round of investment boom as it continues to scramble for shares.

Bitcoin is Wall Street's "potential stock"

For assets with low costs and high potential returns, moderate participation can significantly enhance the yield of the asset portfolio while controlling overall risk. Bitcoin is currently relatively undervalued in the traditional financial market, and its correlation with mainstream assets is low (although not as negatively correlated as before). Therefore, for mainstream funds, holding a certain proportion of Bitcoin seems like a logical choice.

More importantly, if Bitcoin becomes the highest returning asset in the mainstream financial market in 2024, those fund managers who do not allocate Bitcoin will find it difficult to explain to investors. Conversely, if they hold 1% or 2% of Bitcoin, even if the fund manager personally is not optimistic and even if there are losses, the overall performance will not be overly affected by the risks of Bitcoin, making it easier to explain to investors.

Bitcoin: The Invisible Investment Choice of Wall Street Fund Managers

The previous discussion focused on why Wall Street fund managers might be forced to buy Bitcoin, and now let's explore why they might actively choose to purchase Bitcoin.

The Bitcoin network has semi-anonymous characteristics. The SEC may find it difficult to comprehensively monitor fund managers' Bitcoin spot accounts like it does with regulated securities. Although depositing and withdrawing tokens and conducting over-the-counter transactions on major trading platforms require identity verification, offline over-the-counter trading still exists. Regulators may not have sufficient means to comprehensively monitor financial professionals' spot positions.

The previous discussion provides sufficient objective reasons for fund managers to invest in Bitcoin. Since Bitcoin itself has limited liquidity, a small amount of capital could significantly affect its price. So as fund managers, what other factors would prevent them from using public funds to profit for themselves in the presence of sufficient objective reasons?

Natural Traffic Growth of the Project

Natural traffic growth is a unique phenomenon in the crypto market, and Bitcoin has long benefited from this phenomenon.

The natural growth of Bitcoin's traffic refers to other projects that, in order to leverage Bitcoin's popularity, have to enhance Bitcoin's image, ultimately injecting the traffic they generate back into Bitcoin.

Looking back at the issuance process of all alternative coins, the legendary story of Bitcoin will be mentioned, along with the mystery and greatness of Satoshi Nakamoto. This further explains how their projects are similar to Bitcoin or hope to become the next Bitcoin. Bitcoin does not require active operation, as it can passively build its brand through these imitators' projects.

Currently, the competition among projects is becoming more intense, with dozens of Layer2 solutions on Bitcoin and tens of millions of inscription projects trying to borrow traffic from Bitcoin, collectively promoting the large-scale adoption of Bitcoin. For the first time, the Bitcoin ecosystem has so many projects endorsing it, so this year the natural traffic growth of Bitcoin may be stronger than in the past.

Summary

The biggest change in the market compared to last year is the approval of the Bitcoin ETF. Through analysis, we found that all factors seem to be driving the price of Bitcoin up. Supply is shrinking, and demand is surging.

In summary, I believe that Bitcoin is likely to be the most promising investment opportunity in 2024.