The year-long resurgence in inflation is getting another tailwind, this time from supply shocks.
Europe’s peak inflation print (8.1%) on the back of rising food and energy costs being the most recent example inflation’s grip on the global economy (see our May 16th Bulletin, Code is Law for more on BTC integrity vs. Fiat profligacy).
An energy supply shock was a core driver of the recent inflation increase, with knock on effects for the economy, including reduced consumption, travel, etc. First-year economics students are taught about the impact that supply and demand have a direct impact on price changes for a good or service, all other factors held constant. For Europe, the 8.1% inflation release is a real-life example of what happens to price when supply increases in the face of steady demand.
Decreasing Supply Constructive for BTC and ETH Owners
Where the supply shock discussed above was both unexpected and costly to consumers, the disinflationary nature of BTC’s and ETH’s supply is a constructive dynamic for coin owners (see April 25th Digital Asset Bulletin, The Monetary Ratchet).
Supply & Scarcity
While both BTC and ETH are disinflationary digital assets, their inflation mechanisms and rates differ.
Bitcoin’s encoded approach ties coin issuance to block production. Specifically, the issuance of BTC is cut in half after the production of 210,000 blocks, roughly every 4 years.
Ethereum’s more centralized structure employs a different approach, ensuring disinflation via upgrades and soft-forks over time, often resulting in a reduction in the rate of coin production.
Though different approaches, both the Bitcoin and Ethereum protocols are programmed to disinflate over time. Where Bitcoin’s supply is codified, adding ~ 3 million coins over the next 120 years for a total of 21,000,000 BTC, Ethereum imposes no maximum supply of ETH, only upgrades to manage supply.
As disinflationary digital assets, the market prices of both BTC and ETH are quite sensitive to new changes in demand.
As noted above, macro-economic theory posits that increasing demand with stagnant or disinflating supply sends prices higher. Applying this core economic axiom to BTC and ETH, we are not surprised to see the degree of price appreciation noted in the table at the bottom of our report.
With supply constrained by code or ‘upgrades’, demand remains the more variable and impactful factor in determining BTC’s and ETH’s price. Just ask that first-year economics student.
Using historical Google search results as a proxy for demand, we are not surprised to see the upward trend for BTC and ETH over the last 10 years relative to all search results on Google. The resulting numbers are scaled on a range of 0 to 100 based on a topic’s proportion to all searches on all topics, around the globe.
For example, the readings of 100 for Bitcoin in late 2017 and Ethereum in Q2 2021, occurred near market tops for the coins, meaning they were the most searched for item on Google at that time.
To gauge institutional interest over the last ten years, we used keyword searches based on U.S. regulatory filings. The below graph illustrates the number of US reporting issuers that have mentioned at least one of the digital asset-related keywords noted below. The search across 10Q filings can be used as a sentiment indicator of interest in the digital asset space by these filing institutions.
A key feature of open-source blockchains like Bitcoin and Ethereum is the ability to peak under-the-hood and visualize the number of funded wallets on each network. The graph below reflects the dollar amount held in individual wallets while the table shows dollar amounts held by institutional and sovereign entities for both BTC and/or ETH.
Note that custodial agents, such as cryptocurrency exchanges, often pool client funds. Such client funds may not be held in segregated wallets, meaning that there are likely a much greater number of holders than outlined below.
Our work shows that both corporates and sovereigns have allocated more BTC to their balance sheets over time. Below we share the allocation as of May 31st 2022.
Source: 3iQ Research. Data sourced from buybitcoinworldwide.com as of May 31, 2022.
Digital Asset Universe
Source: 3iQ Research. Data sourced from Coin.Dance, Etherscan.io as of May 31, 2022.
Source: 3iQ Research. Data sourced from Messari as of May 31, 2022. Figures expressed in USD unless otherwise stated. Past performance is not indicative of future results.
Source: 3iQ Research. Data sourced from Bloomberg as of May 31, 2022. Past performance is not indicative of future results.
Source: 3iQ Research. Data sourced from Bloomberg as of May 31, 2022. You cannot invest directly in an index. Past performance is not indicative of future results.