BTC Held on Exchanges is Now Lowest it Has Been in Last Year
The cryptocurrency market has been moving at such a rapid pace that it is literally unable to keep up. Many traders and publications have reported in recent days that liquidity is dropping sharply. This may have a significant impact on prices in the asset class.
This is actually a fairly common occurrence in the market, often preceding the end of a bull run. But this time is different, because the market has never been more confident in its growth. Fewer investors now see Bitcoin as a gimmicky new asset, and the demand is high.
High demand and low supply is usually a recipe for prices that will skyrocket. But let’s dive deeper into what’s been happening and see if that can tell us more about Bitcoin’s future.
Lower Supply, Higher Prices?
The main argument posited by proponents is the same one presented by Bitcoin halvings. The fewer Bitcoin there is to go around, the more it will cost, if there’s a demand for it.
One analyst, Luke Martin of Venture Coinist, believes that bull cycles end after a liquid supply starts increasing. He presents a chart that shows how BTC’s liquidity drops during bull runs. As is clearly seen, a surge in liquidity follows this phase when the market’s momentum fades.
Of course, it isn’t as simple as saying that higher prices will stem from the lower supply. That demand has to exist — and several metrics point to it.
The number of unique Bitcoin addresses has steadily risen, now somewhere around 608,000. The number of wallets with 1 BTC has also increased, even if it only accounts for about 5% of all addresses. And over 82,000 addresses are now worth over $1 million.
All of this goes to show that there is plenty of room for adoption. One survey even showed that US citizens are highly misinformed about the asset. 20% think that the asset is priced between $1–$100.
The final question is whether there is actually demand, even when there isn’t much BTC to go around. That is a question that challenges the fundamentals of the market. And there are countless investors who will state that BTC has strong fundamental value.
Long-Term Hodling Mentality Taking Over
The number of Bitcoins on all exchanges is 2.36 million — the lowest it has been in at least a year. Why is this happening? If anything, investors would be jumping at the chance to take profits at $30k–$40k levels.
The fact that BTC is moving away from exchanges — and likely into cold wallets — is positive for the long run. Institutional investors hold a sizable portion of these Bitcoins, signalling that they’re taking BTC seriously. The market expects more institutional investors, though BTC remains too volatile an asset for some.
Take MicroStrategy for example. Following its multiple purchases of Bitcoin, there has been a dramatic drop off in the amount of the cryptocurrency available. BTC available declined from roughly 2.7 to 2.3 million between Q3 2020 and January 2021.
But it’s not just MicroStrategy that’s causing liquidity to dry up. Galaxy Digital, Square, Hut 8 Mining, among many others, all possess large sums of Bitcoin.
The total Bitcoin held by public, private and ETF-like companies has crossed over 1.1 million — roughly $37.9 billion. That comes to about 5% of all the BTC that can be mined.
Glassnode CTO Rafael Schultze-Kraft believes that a lack of liquidity will not prove an obstacle for market growth. He thinks so despite the fact that 3 million in BTC is reportedly lost. With lost BTC, more holding, lower liquidity, market enthusiasts are banking that the fundamentals will push demand up.
Some market investors will consider this shortage of BTC as a negative. Conversely, there are those that are expecting too much as far as a supply-driven price spike goes. Yes, historically, there is room to go upwards when one considers the correlation of market momentum and liquidity.
But every new Bitcoin bull run cycle brings with its new factors, and this one is particularly different. The number of investors focusing on more long term gains is much higher than before. We are likely to see more institutional investors buy in bulk.
Ultimately, as is the case with other speculations on BTC’s inherent value, the price comes down to adoption. But with the arrival of PayPal, Square, regulation, CBDCs, and more, it is difficult to criticize predictions that Bitcoin will go up.
Bull runs will always be followed by corrections, and this will bring liquidity back. If the fundamentals are right, prices will go up regardless.
Do you think low supply will push prices up in the near term? What is your outlook for crypto in 2021? Let us know what you think in the comments below.