Demand for the latest Bitcoin investment products is slowing down following the fourth “halving” event of the world’s first cryptocurrency. Spot Bitcoin exchange-traded funds (ETFs) became a benchmark for institutional investments in Bitcoin after their launch in January 2024. Within a few months of launching, the 11 approved spot Bitcoin ETFs managed over $13 billion in inflows, a feat that took years for Gold ETFs to accomplish. At their peak, spot BTC ETFs saw daily net inflows of up to $1 billion, as institutional investors shifted their investments from the Grayscale Bitcoin Trust (GBTC) to the new ETFs.
The Bitcoin halving is a significant event in the Bitcoin timeline that occurs approximately every four years and halves the block reward for miners, reducing the daily addition of new BTC to the market. The recent halving reduced the block reward from 6.25 BTC to 3.125 BTC. The combination of reduced rewards and high demand for BTC through ETFs led to predictions of a supply shock after the halving.
However, despite weeks of consecutive net positive inflows to Bitcoin ETFs, demand for these products seems to be slowing down. Market analysts initially predicted that outflows from GBTC would dry up as institutions ran out of shares to sell, but inflows to ETFs have now turned negative. Before the halving, spot BTC ETFs experienced several days of net outflows in the hundreds of millions of dollars.
Jag Kooner, head of derivatives at Bitfinex, believes that the decline in inflows and significant outflows are not directly related to the halving event. Instead, he attributes it to the decline in the SPX and Nasdaq, as well as geopolitical tensions. Kooner explains that Bitcoin ETFs are considered an alternative investment or a smaller portion of traditional finance investment portfolios. The current situation is likely a result of portfolio rebalancing and reducing exposure to high-risk assets.
Despite the current downturn, Kooner expects demand for ETFs to pick up after the halving, leading to a stabilization of flows and a return of speculation in a bullish market. He attributes BTC’s rally since January 2024 not only to ETF approvals but also to market participants speculating on the impact of spot ETFs on the Bitcoin price.
The theory of a post-halving supply shock, fueled by the high demand for ETFs, has taken a backseat as ETF demand has slowed and turned into net daily outflows. The demand for ETFs stagnated at the end of March when BTC experienced its first week of net outflows. However, there is optimism that ETF demand will rebound if the BTC price approaches critical support levels where new whales, mainly ETF buyers, have a $56,000 on-chain cost basis.
While ETF demand has slowed, open interest in BTC options has increased, suggesting that buy-and-hold investors are waiting on the sidelines while volatility-focused investors take their place. It is worth noting that ETFs are available to both institutions and retail investors under U.S. regulations, making it difficult to determine the impact of various demand drivers in the short term.
The notion of a post-halving supply shock was prevalent in February and March due to heavy inflows into spot ETFs, despite GBTC outflows and new BTC price highs. However, just days before the halving, ETF flows became passive, and the BTC price also experienced a 10% decline from its all-time highs, causing many to reconsider the supply shock theory in the short term.
Nevertheless, some experts remain optimistic that BTC ETF demand will reach new highs as market conditions improve after the halving.