Bitcoin liquidity is declining, data from Glassnode shows, which could propel BTC price even higher.
Bitcoin is becoming more difficult to buy, according to analysts at Glassnode. The amount of BTC received and spent among entities is decreasing, which means the liquidity is declining.
If Bitcoin (BTC) liquidity is low, it means there is less BTC available to buy and sell. In the medium term, this could make BTC even more scarce.
Bitcoin on track for an explosive 2021
Throughout 2020, institutions have been increasingly accumulating Bitcoin, which has become compelling because of its fixed supply.
In recent months, the concerns about inflation and rising central bank liquidity have intensified. This trend has led high-profile institutional investors, like Paul Tudor Jones, to consider Bitcoin as a potential hedge against inflation.
Meanwhile, a trend that was kickstarted by MicroStrategy’s $425 million Bitcoin purchase in the summer spilled over to other financial giants. Eventually, PayPal, Square and even insurance conglomerates like MassMutual stepped into the fray.
Consequently, the institutional accumulation of Bitcoin has accelerated since. As a result, Glassnode found that only 4.2 million BTC are in constant circulation for buying and selling. The firm wrote:
“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.”
In the past 12 months, $27.8 billion worth of Bitcoin has become illiquid. More long-term investors are holding onto their BTC, refraining from selling their assets.
If long-time holders continue to move away from selling their BTC, the dominant cryptocurrency would become more scarce and difficult to accumulate.
Such a trend would push up the value of Bitcoin in the longer run, fueling the ongoing bull cycle. The analysts explained:
“Over the course of 2020, a total of 1 million additional BTC have become illiquid — investors are increasingly hodling. This is bullish, and suggests that the current bull run has been (partly) driven by this emerging #Bitcoin liquidity crisis.”
There is a variable in miners
Another factor that could cause the circulating supply of Bitcoin to decrease in the foreseeable future is miners.
Kyle Davies, the co-founder of Three Arrows Capital, said that there is a shortage of ASIC miners. Typically, miners would deploy capital to acquire hardware such as ASIC miners. But given that they are unable to buy, that could potentially drive inflows into BTC. He said:
There is a big shortage of ASIC’s. Miners only need to sell enough bitcoin to cover existing USD operational costs. They are incentivized to hold all capital that would otherwise be deployed into buying hardware, in $BTC.
— Kyle Davies (@kyled116) December 30, 2020
The combination of multiple factors, such as increased HODLing activity, the likelihood of miners selling less BTC, and the drop in Bitcoin liquidity could further fuel BTC’s momentum in the first quarter of 2021.