As demand for Bitcoin skyrockets, supply plummets

English Dec 23, 2020

There are two key factors that affect the price of Bitcoin: supply and demand. And although the available supply is decreasing, the demand has been increasing rapidly.

Institutional investors and companies have entered the market, buying huge amounts of Bitcoin - putting pressure on demand. At the same time, data shows that the amount of Bitcoin available on exchanges has decreased. This is already affecting the market.

Supply crisis

According to Glassnode, the supply of Bitcoin maintained on the exchanges has dropped 20% since January. It is a trend that can be observed in all exchanges. Bitcoin may have been sent for long-term storage, for custody solutions or for larger investment funds. But, crucially, that means less supply for negotiations.

In fact, less than 13% of all existing Bitcoin is currently maintained on cryptocurrency exchanges available for trading. In addition, a Glassnode report also tracked the amount of Bitcoin that is liquid (freely available for trading) as opposed to the gross amount, where the currency is kept out of exchanges and not available for purchase or sale, showing that the amount of Bitcoin liquid has declined dramatically, with only 12% of the total stock remaining as liquid.

In addition, 14.4 million Bitcoins - equivalent to 78% of the total supply of Bitcoins - are being held by illiquid entities. With only 12% of Bitcoin's total supply being maintained by liquid entities, this metric shows that 2020 has caused perpetual pressure on Bitcoin's liquidity.

"Illiquid entities spend less than 25% of the BTC they receive, acting as supply sinks in the network," said Schultze-Kraft.

However, according to Schultze-Kraft, this supply crisis should not prevent regular investors from buying. "The supply crisis will have an impact on the price, but it does not necessarily prevent retail investors or smaller investors from entering the market." Since individual investors looking to get into Bitcoin can still buy on the market, it is institutional investors who have the most reason to worry. The supply crisis does not seem to have a date to be resolved.


Morel Hernandes

Writer passionate about politics, economics, blockchain and crypto-currencies.