Top Analyst Says 'Paper Bitcoin' Is Driving The Market, Not The 21 Million Supply Cap

Bitcoin’s core value proposition—its hard 21 million supply cap—has come under scrutiny as alternative investment vehicles dilute its scarcity appeal. Analysts say that synthetic exposure to Bitcoin, such as ETFs, cash-settled futures, and options, has flooded the market with a "paper supply" that undermines the traditional supply-demand model according to Yahoo Finance.

The idea of a fixed supply has long been a key argument for Bitcoin’s value, but this is no longer a reliable anchor in today’s market. Financialization has enabled investors to access Bitcoin without owning the actual asset. This has created a situation where the price is dictated by derivatives and other synthetic instruments rather than the limited supply of the asset itself as reported.

The impact is visible in the broader market. Bitcoin’s price has fallen below $70,000, reaching a 15-month low, with spot Bitcoin ETFs losing over $1.3 billion in assets year-to-date. Market observers, including veteran analyst Bob Kendall, argue that this structural shift has turned Bitcoin into a "derivatives game." They point to similar changes in traditional markets like gold and oil, where synthetic supply mechanisms have also eroded natural scarcity according to analysis.

Why Did This Happen?

The rise of alternative investment vehicles has accelerated the shift. ETFs and derivatives now offer broad access to Bitcoin without the need for direct ownership. This synthetic supply has created an environment where Bitcoin’s price is driven more by financial instruments than by its actual scarcity as Yahoo Finance reports.

Bitcoin ETFs, which once reached a peak of $168 billion in assets, have now fallen below $100 billion after a $272 million outflow on February 4. This trend reflects broader crypto market weakness, with Bitcoin trading below $74,000 and the global market cap declining to $2.64 trillion.

How Did Markets React?

The market is responding to the growing influence of synthetic supply and derivatives. Zcash (ZEC), for example, has posted double-digit gains as it recovers from a 40% drop since early February. Despite this, the derivatives market remains weak, with ZEC futures Open Interest (OI) declining to $335 million from $396 million the previous day.

Bitcoin’s price has also been hit by coordinated selling, according to chart analyst Peter Brandt, who sees signs of institutional-led selloffs rather than retail capitulation as reported. Analysts at Stifel and other firms now fear a further drop in Bitcoin to as low as $38,000 according to analysis.

What Are Analysts Watching Next?

The next phase of institutional adoption may involve a shift from ETFs to direct onchain trading. Thomas Restout, CEO of B2C2, notes that institutions have shown resilience in ETF investments but suggests that the next wave of adoption will see investors trading Bitcoin directly according to Cointelegraph.

Meanwhile, market observers are watching for signs of recovery in the derivatives market. Zcash’s RSI is rising toward the midline, indicating fading bearish momentum. A recovery above the 200-day EMA at $302 could reinforce a bullish trend.

Bitcoin ETFs are also under scrutiny. As prices trade below the ETF creation cost basis, new shares are being issued at a loss, creating pressure on fund flows. Analysts like Nate Geraci and Thomas Restout believe most institutional ETF assets will remain stable, but the next shift may involve direct trading of the underlying assets according to Cointelegraph.