What if Wall Street starts buying Bitcoin?

BlackRock, Fidelity and Co. are taking the market by storm with their ETF offerings. But is there enough Bitcoin to meet the explosive demand?

BlackRock has taken the crown with its Bitcoin Spot ETF. Bitcoin is in the green and investors are hoping for an explosion in market capitalization. After all, if the five largest asset managers in the world are only one percent of their capital (about US$250 billion) into Bitcoin, the entire crypto market would benefit. Bitcoin, however, is limited to just 21 million units. So while demand continues to rise, supply is vastly limited - especially since much of it is already owned by hodlers.

Because this is a spot ETF, BlackRock, Fidelity en co. physically hedge the Bitcoin they hold in custody. This is where the problem comes in: because even crypto exchanges only hold a limited amount of Bitcoin, supply is shrinking, while demand may not yet be extinguished. But it will likely be some time before the U.S. securities regulator SEC approves ETF applications. The SEC's decisions could affect Bitcoin's liquidity.

Liquidity of Bitcoin

Liquidity describes the ability to convert Bitcoin into another asset class quickly and almost without price distortions. Example: suppose you own an entire Bitcoin and want to sell it. In a liquid market, your Bitcoin can be sold without major problems and with minimal price fluctuations. Because: as a rule, there are plenty of buyers willing to buy Bitcoin at a fair price. In contrast, in an illiquid market, it is more difficult to find a buyer. Low demand means Bitcoin must be sold at a lower price.

The liquidity of a market is often determined by its trading volume. The higher the trading volume, the more liquid the market. Currently, Bitcoin's trading volume is US$16.2 billion. Compared to the same month last year, there is a marked decline. So how liquid is Bitcoin right now? Can BlackRock and Co. get enough Buying Bitcoin?

Bitcoin: is liquidity sufficient?

In total, more than four million Bitcoin are on offer, of which just under 75 percent are available in the near term. That's still $124 billion that the world's largest asset managers could invest. After that, things get tight: about 15.2 million Bitcoin are illiquid. This means investors are not so quick to part with their assets.

Currently, a decrease in supply can be clearly seen. Moreover, based on Glassnode data, it is possible to identify certain moments that were responsible for the drop in liquidity. In the past, for example, the collapse of FTX in November or the lawsuit against Binance in early June.

Both events led to a loss of confidence. Many investors subsequently withdrew their capital from the exchange to, for example, a proprietary crypto wallet. As a result, liquidity has continued to decline. To fulfill the purpose of a Bitcoin spot ETF in the future, BlackRock and co. will need to invest in Bitcoin. If money flows into the market in the traditional way, a price rise is practically inevitable.

BlackRock and private investors fight over Bitcoin

In any case, well-known crypto celebrities are counting on a price hike, including Gemini founder Cameron Winklevoss and Bitcoin bull Michael Saylor. The latter fears retail investors will be pushed away by rising institutional demand. Crypto analyst Anthony Pompliano, on the other hand, expects a tug-of-war between the two parties:

We have seen institutions and individuals fight to get their share of the 21 million Bitcoin. The private investor has been ahead for 15 years, collecting all the Bitcoin that has been put into circulation.

If "Wall Street and BlackRock participate in the market" Bitcoin could become "very illiquid" because private traders "don't want to sell to Wall Street," Pompliano says. The only thing that can move in this constant system, he says, is the price.