Bitcoin is becoming more difficult to buy, according to analysts at Glassnode. The amount of BTC received and spent between entities is decreasing, which means that liquidity is decreasing.
If Bitcoin (BTC) liquidity is low, it means that there is less BTC available to buy and sell. In the medium term, this can make BTC even scarcer.
Bitcoin on the way to an explosive 2021
Throughout 2020, institutions have accumulated more and more Bitcoin, which has become attractive due to its fixed supply.
In recent months, concerns about inflation and the increase in central bank liquidity have intensified. This trend has prompted high-profile institutional investors like Paul Tudor Jones to consider Bitcoin as a potential hedge against inflation.
Meanwhile, a trend that was driven by MicroStrategy’s $ 425 million Bitcoin purchase in the summer has spread to other financial giants. Eventually, PayPal, Square and even insurance conglomerates like MassMutual joined the fray.
Consequently, the institutional accumulation of Bitcoin has accelerated since then. As a result, Glassnode found that only 4.2 million BTC are in constant circulation for purchase and sale. The firm I wrote:
“Bitcoin liquidity is defined as the average proportion of BTC received and spent between entities. We show that currently 14.5M BTC are classified as illiquid, leaving only 4.2M BTC in constant circulation that are available for purchase and sale. “
In the past 12 months, $ 27.8 billion in Bitcoins has become illiquid. More long-term investors are holding on to their BTC, avoiding 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.
This trend would increase Bitcoin’s value in the long run, fueling the ongoing bullish cycle. Analysts explained:
“Over the course of 2020, a total of 1 million additional BTCs became illiquid – investors are increasingly confused. This is optimistic and suggests that the current bullish run was (partially) driven by this emerging #Bitcoin liquidity crisis. “
There is a variable in miners
Another factor that could cause the circulating supply of Bitcoin to decline in the near future is miners.
Kyle Davies, the co-founder of Three Arrows Capital, said there is a shortage of ASIC miners. Miners typically distribute capital to purchase hardware, like ASIC miners. But, given that they cannot buy, this could potentially lead to inflows into the BTC. He said:
There is a great shortage of ASICs. Miners only need to sell enough bitcoin to cover existing operating costs in dollars. They are encouraged to keep all the capital that would otherwise be implemented in the purchase of hardware, in $ BTC.
– Kyle Davies (@ kyled116) December 30, 2020
The combination of several factors, such as increased HODLing activity, the likelihood that miners will sell less BTC and the drop in Bitcoin’s liquidity, may further fuel BTC momentum in the first quarter of 2021.