At only 22% of the circulating supply, the total number of liquid bitcoins (BTC) on the market is quickly drying up, according to onchain data.
Added with the halving last year, which caused a 50% supply shock to all newly minted bitcoins, and it’s looking like we could be entering a significant liquidity crisis.
It’s estimated that 78% – 14.5 million bitcoins are illiquid, whereas only 4.2 million bitcoins are liquid and in regular circulation.
According to data analyst firm Glassnode, ‘78% of the circulating bitcoin supply is illiquid and therefore hardly accessible for buying. This points to a bullish investor sentiment as large amounts of BTC are being hoarded – which reduces sell pressure.’
‘Bitcoin liquidity is defined as the average ratio of received and spent BTC across entities. We show that currently 14.5M BTC are classified as illiquid, leaving only 4.2M BTC in constant circulation that are available for buying and selling.’
Institutional Demand For Bitcoin Is Growing
Bitcoin’s liquidity on exchanges dwindled throughout 2020, as institutional demand for Bitcoin has bought up and moved bitcoins from exchanges into cold storage.
According to CryptoQuant, the number of bitcoins kept on cryptocurrency exchanges continuously dropped throughout 2020, and into the new year.
Looking at the graph below, we can see bitcoins held on exchanges peaked at almost 3 million just after the halvening, and since then there has been a definitive decline to about 2.3 million, a drop of over 20%.
During this same period, the correlation between the Bitcoin price and the growing number of whale addresses – those holding over 1000 bitcoins, is clear to see.
Again, looking at the graph below we can see the price action is mirroring that of whale accumulation, where we now see about 2075 whale addresses. And of course, at the same time we have been enjoying a huge ride up in the value of Bitcoin.
Bitcoin circulating supply drying up on exchanges and whale addresses growing – both back up a recurring narrative in the Bitcoin space of a liquidity crisis.
What Is Driving Bitcoin’s Liquidity Crisis?
It’s all about supply and demand, and as we know Bitcoin incurred its third halvening event in May last year.
The Bitcoin halvening is programmed to take place every 210,000 blocks, roughly four years, and it automatically cuts in half the new supply paid to miners, known as the block reward.
The last halving saw the block reward cut from 12.5 bitcoins per block to just 6.25 – 1800 new bitcoins a day on the market cut to just 900.
This is arguably the main force behind Bitcoin’s circulating supply crisis, but there are other factors that are driving the supply away from liquidity.
As stated, the amount of whale addresses is rising quickly, and these are made up of high net worth individuals and institutions.
The institutional demand for Bitcoin comes as no surprise to anyone in the Bitcoin space, but the speed at which it is taking off is surprising.
There have been several institutions and funds in Bitcoin for a few years, and Grayscale Bitcoin Fund (GBTC) is the biggest, with $24.2 billion AUM in Bitcoin alone.
Last year’s biggest news and probably the biggest driver of the institutional demand for Bitcoin, however, is MicroStrategy (MSTR).
A relatively unknown publicly traded business intelligence firm before August 2020, the company invested $425 million of its liquid cash treasury into buying bitcoins.
The company has since invested a total of $1.15 billion in Bitcoin, and has “legitimized” it in the eyes of every CEO around the world.
Since MicroStrategy announced they were adopting a Bitcoin standard, we have seen the likes of Square Inc., insurance giant MassMutual, and the Wall Street behemoth Guggenheim Partners all follow them and gain exposure to Bitcoin.
PayPal is also “guilty” of driving the liquidity crisis after it announced it would be offering a Bitcoin service in October 2020.
PayPal has initially rolled its Bitcoin service out to its US customers only, but the amount of bitcoins it has been accumulating just to meet demand for its US customers is outstripping new daily supply.
What will happen when PayPal rolls its Bitcoin service out to the rest of the world this year?
Bitcoin Liquidity Is Drying Up
Bitcoin’s maturation as an asset is clear for everyone to see. The demand for Bitcoin from the smallest retail trader to some of the biggest companies in the world is all leading towards a Bitcoin liquidity crisis.
Exchanges have never had such a small percentage of the Bitcoin circulating supply, and whales’ addresses are rising along with the price action.
MicroStartegy, MassMutual, PayPal and other publicly traded companies see the benefit of hodling Bitcoin on their balance sheet, and funds like Grayscale (GBTC) are attracting big money.
There are more than 30 publicly traded companies all knowingly with exposure to Bitcoin. They have accumulated over 1.1 million bitcoins, and that will continue as other companies follow suit.
All of these developments have drained the liquid circulating supply of bitcoins, added with the Bitcoin halvening cutting the new supply by 50% and if this continues we might indeed have to call it a Bitcoin liquidity crisis.
Bitcoin FAQs
There are several reputable Bitcoin exchanges operating around Africa and much of it depends where you are. However, the most recommended exchanges are Kraken or BlockFi. Or you can buy Bitcoin from Bitcoin marketplaces, such as LocalBitcoins or Paxful. All of these exchanges and marketplaces are global with high liquidity and excellent customer service. Check out our reviews on each platform.
Yes. Every Bitcoin can broken down into 100 million bits. They are known as satoshis, after the pseudonymous creator Satoshi Nakamoto. And some companies will let you buy as little as $1 worth of Bitcoin, which at time of writing is worth about 11,000 satoshis. There are many companies that have a system for dollar cost averaging (DCA). This is a great way to buy Bitcoin, and is known in the space as ‘Stacking Sats’. Basically, what you do is set up small automatic, recurring payments to buy Bitcoin (or sats), and you DCA over time.
You can get rich from Bitcoin, but most people haven’t. Anybody who expects to get rich, especially from a little investment, will likely be disappointed. Bitcoin isn’t a get rich quick scheme, and should be seen as a risky and volatile asset that could bring gains for anybody who can stomach volatility. If you’re interested in and want to buy Bitcoin, you should really have a long term plan.
Nothing is really free, because even when you earn free Bitcoins you’re giving up your time, which is precious. But you can earn free Bitcoins. If you are a gamer, there are games that allow you to win satoshis. Or there’s Carrot – a platform where you can earn free Bitcoin for doing tasks. Or you can save your Bitcoin in an interest bearing account and earn some BTC interest. Be careful with these, and only go with legitimate companies, though. I recommend Blockfi, you can read the review here.
A Bitcoiner since 2017 and a Bitcoin Maximalist since 2018, Tommy is our main writer and editor at Bitcoin Maximalist. Other than researching and writing about Bitcoin, Tommy loves spending time with his family and supporting his beloved Leeds United.
