The Frenzy of the Digital Encryption Market in 2024: The Rise of Bitcoin and Its Underlying Mechanisms

In 2024, the digital crypto market is exhibiting an unprecedented frenzy, with Bitcoin (BTC) standing out in particular. Over the past month, BTC's increase has astonishingly exceeded 50%. What mechanisms lie behind this abnormal market performance? Can this madness continue? Let's delve into these questions.

The rise in the price of any asset is inseparable from a decrease in supply and an increase in demand. We can analyze the price trend of Bitcoin from both the supply side and the demand side.

Supply Side Analysis

Despite the continued halving of BTC reducing the supply-side impact on its price, we still need to pay attention to the potential selling pressure situation:

1. According to consensus, less than 2 million new BTC will be produced, and the rate of increase will once again face a halving. This means that the new selling pressure after the halving will further decrease.

2. Observing the miner's account, which has consistently remained above 1.8 million coins, indicates that the miner has no significant tendency to sell.

3. The number of BTC held in long-term accounts continues to grow, currently around 14.9 million coins. The actual circulating supply of BTC is very limited, with a market value of less than $350 billion. This also explains why a sustained daily purchase of $500 million can lead to a rapid increase in BTC prices.

Demand Side Analysis

The increase in demand mainly comes from the following aspects:

1. The liquidity increase brought by ETFs
2. The increase in asset value held by the rich
3. Financial services are more attractive than short-term investments.
4. For the fund, BTC can be bought wrong but must not be missed.
5. The position of BTC as the core of traffic

ETF: A Unique Catalyst for Bitcoin in This Bull Market

BTC has gained eligibility to enter the traditional financial market through the SEC's ETF approval. This means that compliant funds can finally flow into BTC, and in the encryption world, traditional financial funds can only flow into BTC.

The deflationary characteristic of BTC makes it easy to form a positive feedback loop. As long as funds continue to buy BTC, its price will keep rising, and the funds holding BTC will have better returns, allowing them to expand their scale to further buy BTC. On the other hand, funds that have not purchased BTC will face performance pressure and may even experience capital outflows.

In the past month, the average net buying on each trading day was less than $500 million, yet it brought over a 50% increase in the market. This is a small buying volume in traditional financial markets, but it has a huge impact on the BTC market.

ETFs have also increased the value of BTC from a liquidity perspective. In 2023, the global traditional financial scale (including real estate) could reach $560 trillion. This indicates that the current liquidity in traditional finance is sufficient to support such a scale of financial assets. The liquidity of BTC is far less than that of traditional financial assets, but traditional finance accessing BTC can create the liquidity needed for a higher valuation of BTC. It is important to note that this compliant liquidity can only flow to BTC and not to other digital encryption assets.

The rich prefer the value growth of Bitcoin

According to market research, billionaires in the crypto market often hold a large proportion of BTC during a bull market, while the proportion of BTC held by middle-class or below middle-class individuals in the crypto market usually does not exceed 1/4 of their position. Currently, BTC accounts for 54.8% of the entire crypto market. This indicates that BTC is primarily concentrated in the hands of the wealthy and institutions.

This phenomenon can be explained by the Matthew effect: the assets held by the rich tend to continue to rise, while the assets held by ordinary people may continue to decline. The wealthy and institutions tend to use altcoins as tools to profit from ordinary investors, while using mainstream tokens with high liquidity characteristics as a store of value. As the liquidity of BTC continues to increase, its appeal to the wealthy and institutions will also rise.

The strategic significance of BTC

After the SEC approved the BTC spot ETF, it triggered competition in the market on multiple levels. Several well-known financial institutions in the United States are vying for leadership in the ETF space, while multiple global financial centers are also following suit with related businesses.

For financial institutions, holding BTC spot not only relates to fee income but also to the pricing power of BTC. Losing BTC spot means losing pricing power over this "digital gold" and the dominant position in the related 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 consensus to crash the market, and instead, it is likely to create a FOMO (Fear of Missing Out) effect in the process of continuously seizing opportunities.

BTC: Wall Street's "inscription"

For traditional financial markets, BTC can be seen as a low-cost, high-odds asset. Moderately investing in BTC can significantly improve the return on investment portfolios without exposing them to disruptive risks. The current valuation of BTC in traditional financial markets is still very small, and its correlation with mainstream assets is low. Therefore, it is a reasonable choice for mainstream funds to hold a certain proportion of BTC.

If BTC becomes the highest returning asset in the mainstream financial market in 2024, fund managers who have not allocated BTC will find it difficult to explain to investors. Conversely, even holding 1% or 2% of BTC, even if they do not like it or incur losses, will not overly affect overall performance due to the risk of BTC, making it easier to explain to investors.

BTC: A Potential Arbitrage Tool for Fund Managers

The semi-anonymous nature of BTC may provide some fund managers with arbitrage opportunities. While mainstream trading platforms require KYC (Know Your Customer) procedures, offline OTC (over-the-counter) transactions may still occur. Regulators may find it difficult to comprehensively oversee the spot holdings of financial practitioners.

Based on the aforementioned analysis, fund managers can reasonably explain their decision to invest in BTC. Considering the liquidity characteristics of BTC, a small amount of capital can significantly affect its price. In this case, fund managers may use public funds to indirectly enhance their own interests.

The self-reinforcing effect of Bitcoin's traffic

BTC has long benefited from the "traffic self-extraction" phenomenon. Other projects, in order to leverage BTC's popularity, have to improve BTC's image, ultimately injecting the traffic they operate back into BTC.

Looking back at the development history of other cryptocurrencies, almost all projects mention the legendary story of BTC and the mystery and greatness of Satoshi Nakamoto, claiming that they want to become the "next BTC". This imitative behavior has unconsciously contributed to the passive operation and brand building of BTC.

Currently, project competition is becoming more intense, with an abundance of Layer2 solutions and inscription projects emerging on BTC, all trying to leverage traffic from BTC to collectively promote its mass adoption. This is the first time the BTC ecosystem has so many projects endorsing it, so this year, the self-reinforcing effect of BTC's traffic may be stronger than ever before.

Conclusion

Compared to last year, the biggest variable in the market is the approval of BTC's ETF. Through analysis, we found that all factors are driving the price of BTC up. Supply is shrinking, and demand is surging.

In summary, BTC is likely to become the biggest investment opportunity in 2024.