Opening bell │ #43 │ 11th February

Report highlights.

1. Ethereum has been inflationary for 300+ days, with supply exceeding pre-Merge levels. Despite 13M ETH being liquid staked, the market supply balance continues to decline.
2. Gold: Perhaps real, perhaps fantasy.
3. Bitcoin ETF inflows arrive with a diminishing price impact. Investors are less willing to buy at a premium, though fundamentals remain strong. There remains a very strong relationship between price and ETF holdings, at least for now.

Fundamentals

Ethereum free-floating supply continues decline despite turning inflationary.

For over 300 days, Ethereum’s supply has been inflating daily, with the circulating Ether now exceeding pre-Merge levels.

Since Ether turned inflationary last April, its supply has increased by 325k coins. Meanwhile, staked ETH has grown by 13 million. Liquid staked ETH (LSE) for the same period has stayed the same.

So, while Ethereum has indeed turn inflationary, the staking rate continues to draw away from available market supply. Since April last year, free floating supply has dropped from 75% to 64%.

Gold

Gold supply disruptions bring counterparty risk of assets to forefront of market discourse.

Last year, this Head of Research penned an op-ed titled “Counterparty risk of gold Increasing, but chances of a supply squeeze still questionable.”

Last week, concerns over the available supply of gold began to surface as increasing volumes of the precious metal moved from London to the US amid speculation that Donald Trump may reprice the country’s gold holdings to market value.

Counterparty risk has now grown exponentially, with clearing banks scrambling to borrow more gold but struggling to find supply.

With deliveries facing massive delays, fears are mounting—just as outlined in the op-ed—that a price dislocation could emerge between spot markets and ETFs holding “unallocated” gold on their books.

While a full-blown supply squeeze has yet to materialize, markets are already pricing in the possibility that it could happen.

If such a scenario unfolds, global liquidity could face significant disruptions—after all, the paper gold market is 133 times the size of the physical supply. This could also create an intriguing, albeit volatile, situation for Bitcoin.

ETF

Bitcoin ETF inflows begin packing smaller punch albeit stable trajectory.

Much like the 12th round in a boxing match, Bitcoin ETF inflows are showing diminishing incremental returns just over a year after they began trading in the US.

From a long-term perspective, the data still indicates that the net relationship remains super-linear.

Since ETFs began trading, inflows have been positive on 7 out of every 10 trading days. Between the start of ETF inflows and just before the German government added a 50k Bitcoin surplus to available supply, the correlation between ETF holdings and price was 0.995—nearly perfect. This correlation has since declined to 0.916, though it remains exceptionally strong.

The usual caveat applies, of course: correlation is not causation. But this can help to gauge market price distortions.

At present, relative to increases in ETF holdings, Bitcoin is trading below the average “trendline” price, which sits at $102,000 (see chart 1).

Fluctuations around this line are common as markets periodically revert to the mean (see chart 2).

While there are still buyers, investors are gradually showing less enthusiasm for acquiring Bitcoin at a large premium. The price change has fallen from nearly 2% for every 5,000 Bitcoins purchased by ETFs in January of last year to just 0.37% today (see chart 3).

This, of course, does not rule out significant price jumps, as we have seen since the US elections. However, an upper limit may emerge if investors begin viewing the market as overheated on a technical level rather than a fundamental one—an issue explored in a simulation study we published last week (see OB#42).

Fundamentals still matter, even if their impact is not immediately obvious. ETFs initially held 3.4% of Bitcoin’s total supply. Today, that share has nearly doubled to just under 6%. Barring major negative macro catalysts, the market appears poised to move higher.

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