Demand for the newest Bitcoin investment products is slowing down as the world’s first cryptocurrency went through its fourth “halving” event. 

Spot Bitcoin exchange-traded funds (ETFs) became a benchmark for institutional investments in Bitcoin (BTC) after launching in January 2024.

The 11 spot Bitcoin ETFs approved by United States regulators in January collectively managed over $13 billion in inflows within a couple of months of launching. Gold ETFs took years to accomplish the same feat.

At their peak, spot BTC ETFs saw up to $1 billion in daily net inflows — the result of institutional investors reallocating investments from the Grayscale Bitcoin Trust (GBTC) to the new ETFs.

The Bitcoin halving is considered an important event in the Bitcoin timeline, which occurs roughly every four years and reduces the block reward for miners by half. Thus, the amount of new BTC added to the market daily is reduced by half. The halving has now reduced the block reward from 6.25 BTC to 3.125 BTC.

Reduced rewards and high demand for BTC via ETFs led many market pundits to predict a supply shock after the April 20 halving.

However, after weeks of consecutive net positive inflows to Bitcoin ETFs, demand for the products appears to be slowing down.

Are geopolitics to blame for BTC ETF outflows?

While many market analysts predicted that GBTC outflows would soon dry up as institutions ran out of GBTC shares to sell, inflows to ETFs have now turned negative.

Ahead of the Bitcoin halving, spot BTC ETFs recorded several consecutive days of net outflows ranging in the hundreds of millions of dollars.

However, despite the current downturn, Jag Kooner, head of derivatives at Bitfinex, believes the demand for ETF will catch up after the halving.

“The reduction in inflows and significant outflows is not correlated to the halving event but rather to the current SPX and Nasdaq decline and geopolitical tensions. Bitcoin ETFs are an ‘alternate investment’ or a smaller part of large TradFi [traditional finance] investment portfolios. The current situation is likely a product of rebalancing risk on those portfolios and reducing exposure to high-risk assets,” he said.

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Kooner added that BTC’s impressive rally since January 2024 was thanks not only to ETF approvals but also to market participants speculating on the impact of spot ETFs on the Bitcoin price.

Thus, “we expect a stabilization of flows to result in a return of speculation on a bullish tipping of flows while we return to bullish trending market conditions.”

Bitcoin supply shock theory takes a backseat

The first three months of spot BTC ETF inflows ranged from three to 10 times the daily mining supply of 900 BTC. The high ETF demand and heavy buying from institutional giants such as MicroStrategy led many market analysts to predict a post-halving supply shock.

A Bybit report predicted that BTC reserves on exchanges could dry up within nine months of the BTC halving, while other analysts predicted a six-month time frame. According to data shared by crypto analytics firm CryptoQuant, BTC supply on centralized exchanges fell to a three-year low of 1.94 million BTC by April 16.

Ki Young Ju, CEO of CryptoQuant, made a similar prediction, saying BTC could face a severe supply shock “within six months” of the halving.

But, by the third week of April, ETF demand has slowed to consecutive net daily outflows. The demand for ETFs stagnated at the end of March when BTC saw its first week of net outflows.

Young stated that the demand for ETFs may rebound if the BTC price approaches critical support levels where new whales — mainly ETF buyers — have a $56,000 on-chain cost basis. The cost basis of an investment is the total amount initially invested plus any commissions or fees involved in the purchase.

Kooner added that people often ignore the long-term holders with a significant amount of supply. He said that there could also be a major distribution from long-term holders during the later stages of the current cycle, explaining:

“The demand for spot Bitcoin ETFs is unprecedented by all accounts, but a single metric cannot measure demand for BTC itself. However, the market decline is evidence enough that the demand doesn’t currently outstrip BTC supply on an absolute basis.”

While ETF demand has slowed, open interest in BTC options has increased, implying that buy-and-hold investors are waiting on the sidelines while volatility-focused investors are taking their place.

Josef Tětek, Bitcoin ambassador at hardware wallet maker Trezor, told Cointelegraph that ETFs don’t necessarily signify institutional demand.

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Under U.S. regulation, ETFs are available to both institutions and retail investors. Thus, It’s impossible to speculate on the impact and relative influence of various demand drivers in the short term.

“Taking a longer-term view and turning away from U.S. markets, there is rising demand for Bitcoin in countries across the globe as fiat currencies fail as a reliable store of value and even in some countries as a viable medium of exchange.”

The post-halving supply shock notion was prevalent for most of February and March owing to heavy inflows into the spot ETFs despite GBTC outflows and new BTC price highs. However, just days before the halving, the ETF flows turned passive, and the BTC price also slid nearly 10% from all-time highs, prompting many to reconsider their supply shock theory in the short term.

However, some experts are optimistic that BTC ETF demand will reach new highs as market conditions improve after the halving.