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Supply and Demand Economics in the Bitcoin Market

There is a crucial law of economics at play in the current frenzy surrounding Bitcoin (BTC-USD): supply and demand. More bitcoins are being purchased on a daily basis than new coins are being mined.

This discrepancy is largely due to the interest generated by a series of US-listed bitcoin exchange-traded funds approved by the Securities and Exchange Commission in January. These funds have attracted substantial amounts of new investor capital over the past month.

Since the start of February, these products have been acquiring an average of 3,500-4,300 coins daily, as reported by analysts from crypto money management firms. This figure significantly surpasses the 900 coins generated each day by the Bitcoin network over the same period.

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The Impending ‘Halving’

Another potential supply issue on the horizon is the scheduled “halving,” set to occur in two months. As per Bitcoin’s original design by Satoshi Nakamoto in 2009, the supply of Bitcoin reduces by half every four years. Following this impending cut, the daily supply of new coins will be halved to 450 from the current 900, potentially driving prices up.

“We are currently in an optimal position,” mentioned Mark Connors, research head at crypto asset manager 3iQ. “There is a finite supply of Bitcoin with an increasing demand.”

ConnorÔÇÖs firm, 3iQ, has projected Bitcoin’s price to range between $160,000 and $180,000 this year, with an even more astonishing forecast of $350,000 to $450,000 per coin in the following year.

The Influence of ‘Pure Speculative Demand’

Aside from the ETF demand, various other factors contribute to the present supply shortage in the market. For instance, the US government possesses 215,000 BTC, which is currently being held and not sold, restricting the supply. However, this scenario could change in the future.

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Another significant holder and buyer currently is MicroStrategy (MSTR), which recently announced the acquisition of an additional 3,000 BTC. As institutional buyers seek to maintain portfolio balance, they may need to sell, potentially altering the supply-demand equilibrium.

Purely speculative demand is also a driving factor in this market surge, fueled by factors like FOMO. The ease of access to Bitcoin through ETFs has made it more appealing to a broader range of investors, increasing the speculative demand.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other financial sectors.

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