Capital Inflow & Outflow Multiplier
The Bitcoin Multiplier Effect
Dear Bitcoin Strategy Community,
What an exciting week for Bitcoin, with the price approaching the previous ATH! Never before have we been this close to an ATH before the Halving, possibly indicating a left translated cycle, a concept that we covered in 👉 last week’s edition. The reason is clear as day: the ETFs, which we’ve been covering extensively for the past month at Bitcoin Strategy, are causing a supply crunch and pushing the price higher. As seen by our 👉 ETF tracker, this week’s combined net inflow often reached 10,000 BTC per day 🤯. Can we quantify how these flows are going to affect the price? Discover the latest, state-of-the-art, Bitcoin research here at Bitcoin Strategy!
What exactly is the multiplier again?
The multiplier effect refers to the increase in market cap relative to the amount invested. It tells us how much capital inflow is needed to move the price. The higher the multiplier, the bigger the effect the capital has on price.
The Bitcoin Multiplier Effect
With an enormous dollar inflow to Bitcoin due to the ETF demand, examining Bitcoin’s multiplier is more relevant than ever. A total of 7.4 Billion dollars have been invested through the ETFs since its inception.
Until now, a multiplier that is often quoted is from a report of Bank of America from a couple of years back, which mentioned a multiplier of 118. This figure was met with skepticism and contrasted sharply with Glassnode’s research that presented a much more conservative multiplier of around 4. We’ve covered this in a previous edition:
The truth is, the multiplier constantly changes based on the market dynamics. In and outflows in bull and bear markets behave very differently and interestingly, can be accounted for!
Introducing the inflow & Outflow Multiplier
Today, I would like to introduce a new method for analyzing Bitcoin’s Multiplier that accounts for the evolving market dynamics. Typically, the on-chain method for calculating a multiplier is by looking at the change in the Market Cap (price) versus the change in the Realized Cap (money invested).
Instead of simply looking at a ratio between the two the Inflow and Outflow Multiplier use a more restrictive method to filter out noise. Let me explain. Since we use daily data, each day falls into one of the following four categories:
Capital inflow with Price increase: Realized Cap ⬆️ and Market Cap ⬆️.
Capital outflow with Price decrease: Realized Cap ⬇️ and Market Cap ⬇️.
Capital inflow with Price decrease: Realized Cap ⬆️ and Market Cap ⬇️.
Capital outflow with Price increase: Realized Cap ⬇️ and Market Cap ⬆️.
While the first two categories are logical and congruent, the last two are illogical and incongruent. We know that capital flowing into Bitcoin can’t cause the price to go down, yet there are many such data points because the price is also affected by variables not captured in on-chain data and additionally when there’s a small netflow, internal movements of coins can cause these situations to occur.
Filtering out the bad data points and splitting up the Multiplier into the first two categories allow us to observe the interplay of the effects caused by capital flowing in and out of the space.
Key Insights
The Capital Inflow Multiplier (green line) goes from a very high reading at the bottom of a bear market to the lowest reading around a cycle peak. This is because as the price goes up, more and more capital is needed to push the price up even further. At a cycle peak, so much capital inflow is needed to maintain the high price, it becomes unsustainable and the tide shifts. Now, the Capital outflow Multiplier (red line) goes from a very high reading to a low reading until such a high outflow is needed to keep the price down it’s no longer sustainable.
Note that the furthest distance between the multipliers’ peaks and troughs define a change between bull and bear markets.
During the entire bull market the green line will have a low multiplier, a sudden steep rise signifies the end of the bull market.
The current Inflow multiplier is 24, meaning for each net dollar inflow to Bitcoin, the market cap increases by $24.
Conclusion
The new chart is yet again a novel way to view the cyclical behavior of Bitcoin. I hope the interplay of the inflow and outflow provides you with a clear signal. With an alleged 150 Billion inflow due to ETFs and a multiplier of ~24, prices above $200k are definitely in play.
I’ll continue to share my research and do my best to ensure we're on the same page about the implications for Bitcoin's valuation and our investment strategies.
Lastly
Since we broke through all supply resistance levels, we are floating-free in price discovery mode.
What to watch: besides the ETF Tracker, helpful charts are the Key Support Levels and On-chain Value Map.
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Until Next week, 👊
-Root
I will have to read it a few more times to completely comprehend, but thank you for this additional alternative to determining price discovery. Your previous post about moving the goalpost to the left (back in time), that BTC behavior post halving started Jan 11 w/ETFs rather than in April, was brilliant.
Brilliant post.