Summary Bitcoin's daily active users have fallen to a level not seen in over four years. The overwhelming majority of Coinbase's Q1 volume came from institutional traders rather than retail. As BTC matures as an asset, it will behoove investors to remain cognizant of key differences in the macro setup this cycle. The first half of 2024 was one that was jam-packed with positive catalysts for Bitcoin ( BTC-USD ). Spot ETF approvals have generated over 200k BTC of positive net flow into those ETFs in just a few months - nearly $13 billion in dollar-denominated investment capital. The halving in mid-April has added a supply crunch element to Bitcoin that theoretically puts upside pressure on the coin's price if demand for BTC remains constant. With each of these catalysts now in the rearview mirror, the question at this point is what drives demand for BTC going forward? Bitcoin Holder Data Between Seeking Alpha and my personal blog, I've spent the last several weeks sharing my thinking on Bitcoin's fundamental setup, pricing indicators, and the very concept of what the network actually is. In summary, I don't think Bitcoin has lived up to the creator's original intention as a medium of exchange. Furthermore, the Lightning Network has generally failed to scale Bitcoin to the degree many believed that it would - myself included, for what it's worth. When looking at Bitcoin's utility as a peer to peer payment network, we can observe a network that that is currently showing a diminishing number of regular users: 30 Day Avg Active Addresses (CoinMetrics) On May 13th, 30-day average active addresses fell below 730k for the first time in over four years. However, what I view as clear shortcomings don't necessarily undermine the entire investment case for BTC today. As a fixed-supply asset that exists natively on a decentralized, global ledger system, Bitcoin is still an incredibly interesting concept and one that I think justifies some exposure in what is increasingly appearing to be fiscal dominance in the United States. It could be argued that Bitcoin is as much a product as it is an investment. If we equate BTC to be something resembling an insurance policy on the fiat system, then things like inflation, interest rates, and long-term holder trends likely serve as important data points. HODLer Balance (IntoTheBlock) In the chart above, we can see Bitcoin's "hodler balance" as calculated by IntoTheBlock. There are a couple of different ways "hodler" can be defined, but this particular measurement quantifies the BTC that has been held by addresses for at least a year. As each cycle progresses, the longer-term holders have typically amassed more coins, sold into rallies, and started rebuying after the cycle top. As of mid-May 2024, the hodler balance is 13 million coins - or 66% of Bitcoin's 19.7 million circulating supply. While this hodler control of supply is enormous, it's actually down about 6% from the most recent all-time high of 13.8 million BTC in January. HODLer Supply BTC Price December 2016 9.5 $800 March 2018 6.9 $9,600 September 2020 11.8 $10,900 October 2021 10 $62,500 January 2024 13.8 $44,900 Source: IntoTheBlock, supply figures in millions A similar dip in hodler supply to what has been observed this year took place between late May and early December 2019 around the time the price of Bitcoin retraced from $11.3k down to $7.3k. This was shortly before the coin totally bottomed out a few months later at the beginning of COVID. Differences in Demand Between The Cycles FRED The response to COVID had a not-so insignificant impact on Bitcoin's price. At that time, interest rates were at the floor and the government was heavily stimulating - to the point where it was indiscriminately showering the populace with direct cash deposits. With minimal options for travel and entertainment, much of that stimulus money piled into risk assets like stocks and cryptocurrencies. We do not have the same setup today. year over year change (FRED) In fact, consumer price inflation has turned out to be far stickier than was initially forecasted by many of the economists at the Federal Reserve. I suspect this sticky inflation will change how retail buyers engage with assets like Bitcoin and other cryptocurrencies this time around. I would posit that many of the retail consumers who participated in the last Bitcoin price run simply aren't going to do so now because they need the money to pay for essentials. There are clear signals of consumer distress coming from companies like Starbucks ( SBUX ) and McDonald's ( MCD ) that Bret Jensen covered earlier this week: Right now, I believe the average American consumer has a better handle on the U.S. economy than the average investor and a better take on the true level of inflation than governmental statistics. I agree with this and also Jensen's thoughts on market complacency. Additionally, it seems to me that demand for BTC is coming more from the institutional buyers than the retail buyers at this stage of the bull market. Consider the breakout between Coinbase's ( COIN ) retail and institutional business in Q1-24: Coinbase Volume Breakout (The Block) In the first quarter of the year, Coinbase's retail volume came in at $56 billion. This was both a sequential and year over year improvement, but still well behind the level of retail volume Coinbase was doing when Bitcoin last peaked in Q4-21. Coinbase Volume Q4-21 Q1-24 Change Retail $177 $56 -68.4% Institutional $371 $256 -31.0% Source: The Block, author's calculations, dollars in billions Institutional volume was off 31% from the level during Bitcoin's previous cycle peak. In the same quarter, retail volume did less than a third of what it did in the fourth quarter of 2021. The signal here is that, at least in the US market, the bid is mainly coming through products like ETFs. Which means BTC could behave a bit more like a more traditional investment asset than it likely has in past cycles. Pearson Correlation (The Block) Consider Bitcoin's correlation with stocks has generally been high for much of the last four months with about a three-week exception in April. In my view, any broad weakness in the financial markets will likely bring Bitcoin down with stocks. ProShares Bitcoin Strategy Underperforms Despite my short-term caution regarding BTC, I do still have a considerable amount of exposure to Bitcoin and Bitcoin proxies. One ticker that I'm still not holding is the ProShares Bitcoin Strategy ETF ( BITO ). It's possibly easy to be swayed over to BITO given the fund's dividend payment and low-ish 0.95% expense ratio compared to a fund like the Grayscale Bitcoin Trust ETF ( GBTC ). But in the time since the approval of spot ETFs in the United States, BITO is underperforming the spot funds: Data by YCharts BITO's total return since January 11th 2024 is 33.5%. This is admittedly a tremendous gain in just 4 months, but BITO is trailing the spot funds by nearly 2 full percentage points. We can see in the chart above the spot ETFs have a very tight total return range and BITO is obviously the laggard. This is largely due to the constant rollover of contracts from month to month. It is highly likely that rollover expense will be a compounding problem over time. Until a potential future where Coinbase is forced to raise custodial fees on the ETF managers to combat retail volume decay, the spot ETFs are the better way to play Bitcoin in an investment account. Closing Thoughts In my opinion, Bitcoin bulls can be patient and pick their spots to add to core positions. Crypto is quickly becoming a political issue in the United States, and I suspect asset managers may want more clarity on what the regulatory environment is going to look like in 2025 before adding too much more exposure to Bitcoin or any of the other "blue chip" digital assets in the market. Most of the demand for BTC is coming from institutions rather than retail buyers. The latter of which are tapped out, levered up, and increasingly working multiple jobs to make ends meet. That's necessarily a great recipe for Bitcoin demand. I'm very optimistic that we'll inevitably see a six-figure BTC price. But I think it's going to take a little bit longer than some may be expecting.
