Institutional Funds of 1 Billion USD Pour into the Crypto Market, How Will Bitcoin Halving Affect Subsequent Investments?

An increasing number of institutional investors are attracted to Bitcoin, with over 1 billion USD of funds injected into Bitcoin in just two months. This can be seen as a barometer of the revival of cryptocurrency, indicating the potential development trajectory of the market in 2023 and beyond. Bitcoin is gradually gaining recognition from institutional investors, being seen as a mainstream asset category with considerable long-term growth potential. In addition, the combination of Bitcoin's limited supply and the upcoming halving event enhances its attractiveness, especially for investors seeking scarcity, with the potential launch of Bitcoin ETFs.

CoinShares released its latest weekly report on November 13, emphasizing the narrative of funds flowing back into Bitcoin and altcoins. With the excitement building around the potential approval of the first US ETF, Bitcoin, Ethereum, and some major altcoins are experiencing price increases.

According to TradingView data, the total cryptocurrency market capitalization has increased by 600 billion USD since November 2022. As detailed in the CoinShares report, funds for cryptocurrency investment products have significantly increased over the past two months. The report revealed, "The total inflow of funds into digital asset investment products last week was 2.93 billion USD, pushing the seven-week inflow past the 10 billion USD mark. The total inflow year-to-date is 11.4 billion USD, marking the third-highest annual inflow on record."

A notable statistic highlights the revival of cryptocurrency in 2023: the assets under management (AUM) of cryptocurrency exchange-traded products (ETPs) have nearly doubled since the beginning of the year, increasing by nearly 10% just last week.

CoinShares emphasized, "The total AUM has now reached 443 billion USD, marking the highest level since the major cryptocurrency fund closures in May 2022." The report also revealed that bullish sentiment dominated Bitcoin trading volume. The report stated, "The total inflow into Bitcoin last week was 2.4 billion USD, pushing the year-to-date inflow to 10.8 billion USD, while bearish sentiment saw an outflow of 7 million USD, indicating continued bullishness in the market."

With the continuous growth of the cryptocurrency market, Ordinals has also seen exceptional popularity. Previous articles from the veDAO Research Institute mentioned the network congestion caused by the surge in Ordinals trading, and as interest in BRC-20 tokens continues to grow, Bitcoin transaction fees have also risen. After weeks of accumulation, average transaction fees have soared since the end of October, reaching a six-month high on November 9, exceeding 16 USD. Fortunately, the evolving Bitcoin sidechains and scalability protocol ecosystem are expected to simplify Ordinals transactions and restore fees to more manageable levels.

In the 14 years since Bitcoin's inception, the volume of transaction data has surged, and the emergence of Ordinals is just the latest trend, putting pressure on the limited throughput of the blockchain. As researchers began to focus on Bitcoin's scalability challenges in the mid-2010s, the initial focus was on achieving faster and cheaper transactions. For example, the Lightning Network, launched in 2019 as a dedicated Layer2 network, aims to support peer-to-peer Bitcoin micropayments.

In the context of Ordinals, connecting BRC-20 tokens to more efficient sidechains can significantly reduce fees and create a smoother trading environment. For example, Bioniq uses the Internet Computer Protocol (ICP) to encapsulate Ordinals, allowing users to trade without incurring transaction fees. Similarly, Bitmos, a dedicated blockchain network built on Cosmos, aims to enhance the scalability of Ordinals projects. The platform is scheduled to launch next year, and a cross-chain bridge will allow users to freely move BRC-20 tokens between Cosmos chains.

With the development of Ordinals, bridging and scalability solutions may support new and more complex use cases for Bitcoin-based assets. This will also reflect on the dynamics of Bitcoin supply.

In response to the growing interest, on-chain analytics company Glassnode has conducted an in-depth reassessment of Bitcoin supply dynamics. According to Glassnode's latest weekly report "The Week On-Chain __," there are only five months left until the next halving event, and the amount of Bitcoin held for storage now exceeds the mining output by 2.4 times. The upcoming fourth halving event holds significant fundamental and technical implications for Bitcoin. Glassnode noted that given the significant returns in previous cycles, this is an attractive event for investors.

The weekly report includes multiple charts, with one showing the storage of Bitcoin supply by long-term holders (LTH), entities holding tokens for 155 days or longer. Philip Swift, the founder of the statistical platform Look Into Bitcoin, emphasized the continuous increase in the presence of wallet entities, stating on the 13th, "This is what adoption looks like."

The next Bitcoin halving event is scheduled for April 2024, during which the amount of Bitcoin rewarded to miners will be halved. It is expected that this event will further reduce the supply of Bitcoin, potentially making the asset more attractive to investors.

In previous Bitcoin halving events, we have observed meaningful trends. Firstly, after each halving, the price of Bitcoin experiences a period of increase. Whether this trend will continue into the next halving is yet to be seen. Historically, Bitcoin's halving events have intensified the scarcity of cryptocurrencies, leading to upward price pressure, explaining the bull markets that followed each halving event.

After experiencing the crypto winter of 2022 and the economic downturn of 2023, the halving event of Bitcoin in 2024 is crucial. By slowing down the creation speed of Bitcoin, it will gradually limit the supply of Bitcoin over time, applying the same scarcity as gold. Bitcoin's halving promotes innovation and resilience in its native cryptocurrency, setting it apart from fiat currency. The halving event in 2024 will affect the speed of new Bitcoin entering the market. The event will reduce the reward from 6.25 BTC to 3.125 BTC, and to maintain profitability, miners must find ways to optimize operations. This may prompt miners to increase efficiency.

Furthermore, we can also consider this issue from a longer timeline. In the early stages of Bitcoin, its price was relatively low and volatile. However, as time passed and Bitcoin gradually gained popularity, its price began to rise. This means that while the halving event may have a certain impact on the price of Bitcoin, the long-term trend may depend more on market supply and demand, macroeconomic conditions, and the development of the Bitcoin ecosystem, among other factors.

Overall, the increase in institutional interest in Bitcoin is a positive signal for the crypto industry, indicating that institutional investors are increasingly accepting Bitcoin and viewing it as a legitimate asset category. The next halving event may also have a positive impact on the price of Bitcoin, attracting more investors to invest in this asset.

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References:

https://blog.coinshares.com/volume-157-digital-asset-fund-flows-weekly-report-a8be1d5b3f85

https://insights.glassnode.com/the-week-onchain-week-46-2023/