We've encountered countless analyst estimates claiming $1 of capital inflow into Bitcoin creates a $100 increase in the market cap. We've run the numbers to dispel this Multiplier Myth.
My background isn’t actually related to finance nor economics. Instead, I started my career as a civil engineer, and the more time I spend observing the traditional finance industry, the more have I come to appreciate this as an advantage. I recall a quote from my very first engineering lecture in university, which I find myself reflecting on often;
‘Engineers are taught how to think about problems, and back of the envelope calculations will usually get you 80% of the way to a solution. You can spend an unlimited amount of time solving the complexities of the remaining 20%, only to realise it didn’t even affect the end result enough to justify your time spent on it.
You probably won’t believe me, but around 30% of engineers end up working in finance as they look at the economy like a machine, not as a textbook.
I find it fascinating how some of the outlandish estimates by a large institution catch headlines, even though the numbers just don’t hold up to first grade scrutiny. One example which still gets bandied today is by Bank of America, with a claim suggesting that new capital inflows have a 118x multiplier on the Bitcoin price. Their claim is as follows:
“…we estimate a net inflow into Bitcoin of just $93mn would result in price appreciation of 1%…
The engineer in me has so many questions…so I figured why not go digging for a better answer.
Disclaimer: This article is general in nature, and is for informational, and entertainment purposes only, and it shall not be relied upon for any investment or financial decisions.
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Measuring Capital Inflows
As the Bitcoin market evolves, we must factor in more variables such as spot markets, onchain data, derivatives, and most recently the ETFs. Fortunately, data surrounding all of these markets is relatively accessible, and we can formulate a fairly robust case using onchain data as our analysis backbone.
The goal of this report is to investigate two problems:
What is a reasonable estimate of true demand capital flowing into Bitcoin?
What is a sensible ‘multiplier effect’ of capital inflows on price?
For the purposes of simplicity, we will only focus on the bull market which has been in play since the 9-Nov-2022 bottom, set during the collapse of FTX. This simplifies our calculus as we’re primarily looking at capital required to push prices from $15.7k to new all-time-highs.
The US Spot ETFs
Let’s start small and work our way up.
If we sum all of the USD denominated flows entering the ETFs since launch, we arrive at $29.4B in total. However, we need to subtract the -$17.5B coming out of GBTC, leaving us with a net capital flow of $12.0B into the ETFs.
The $12B in net ETF inflows support a current combined AUM of $52.6B, giving us a local ETF multiplier estimate of 4.4x.
If we allow ourselves the fantasy assumption that the ETFs are the ONLY factor affecting the Bitcoin market, then this $12B in capital inflows created a Bitcoin market cap increase of +$395B.
Using these numbers, we arrive at a multiplier of between 13x (ignoring GBTC) and up to 32x (net flows). This is of course a large and unrealistic result, but somehow is still smaller than the 118x estimate by Bank of America…how did they do it!?
Long-Term Sellers
Another reference point to calculate demand is to look at the sell-side supply. This will again be a rough calculation, but lets assume that 100% of the coins spent by Long-Term Holders since the FTX lows were sold.
For every seller, there is a buyer, and thus we are effectively estimating demand by looking at the USD value of LTH spent coins. Throughout much of 2023, this was around $6B per month. We can also see two larger waves of sell-side in the lead up to, and following the ETFs going live.
In total, Long-Term Holders have ‘sold’ $148B worth of Bitcoin (purple) since the FTX lows. Around 55% of this occurred after the ETFs went live, which suggests these experienced investors took profits knowing there was a source of new demand to soak it up. As such, many LTH coins likely migrated into the ETFs to satisfy the new demand at higher prices.
We now have a somewhat more realistic demand inflow of $148B, measured from the BTC volumes assumed to be sold by LTHs over the last 18-months.
Given the Bitcoin market cap increased by $964B over this period, we can refine our multiplier effect estimate to be somewhere around 6.5x.
Realised Gain (and Pain)
This concept of every seller being matched with a buyer (and vice versa) is a useful framework, and you will see me refer to this idea whenever I talk about realised profit and loss. If this concept of ‘realised value’ is new to you, I’d encourage you to bookmark our masterclass report on the Realised Cap, where we explore this idea in more detail.
If we want to refine our measurement of fresh capital inflows, we should also account for the original acquisition price. We achieve this by pricestamping every coin when it transacts onchain, with an example flow as follows:
Bob buys 0.5 BTC from Alice at a price of $10k back in 2019, and thus invested $5k worth of USD.
Bob HODLed his coins until the 2021 bull run, at which point he sold them to Carol at a price of $60k.
Whilst the total value of this sale was $30k (0.5 BTC x $60k), Bob only realised a profit of $25k, once we account for his original cost value of $5k.
Therefore, we consider the realised profit of $25k to be a NEW capital inflow, and the original $5k offsets the existing cost basis.
Since the FTX lows, a cumulative total of $231B in realised profits have been locked in by coins transacting on-chain. Around $137B of this (~60%) occurred after the ETFs went live, which lines up with the acceleration in LTH spending from above.
Overall, this tells a story of profit taking by both Long and Short-Term Holders in the lead up to, and following the launch of the ETFs. Every seller is matched with a buyer, and the excitement around ETFs was an event that brought in those new buyers.
We can also see that $81B in losses were realised over this time, as fearful 2021-22 cycle buyers exited below their cost basis…concerned that the return of the bear was around the corner.
Note: Our paid subscribers will find our full analysis below, and Parts 1&2 of the video at the end of this report (Part 1 can be found on our Youtube channel).
