According to Glassnode’s data, Bitcoin’s liquidity is declining, which could further boost BTC’s price.
Bitcoin is getting harder to buy, according to Glassnode analysts. The amount of BTC received and spent between entities is decreasing, which means that liquidity is declining.
If Bitcoin’s liquidity (BTC) is low, it means there are fewer BTCs available to buy and sell. In the medium term, this could make BTC even scarcer.
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Throughout 2020, institutions have been accumulating more and more Bitcoin, which has become attractive due to its fixed supply.
In recent months, concerns about inflation and increased central bank liquidity have intensified. This trend has led high profile institutional investors, such as Paul Tudor Jones, to consider Bitcoin as a possible inflation hedge.
Meanwhile, a trend that was driven by Bitcoin’s $425 million purchase of MicroStrategy in the summer has spread to other financial giants. Eventually, PayPal, Square and even insurance conglomerates like MassMutual entered the fray.
As a result, Bitcoin’s institutional accumulation has accelerated since then. As a result, Glassnode discovered that only 4.2 million BTCs are in constant circulation for purchase and sale. The firm published:
„Bitcoin liquidity is defined as the average proportion of BTCs received and spent at all entities. We show that currently 14.5M BTCs are classified as illiquid, leaving only 4.2M BTCs in constant circulation that are available for purchase and sale“.
In the past 12 months, Bitcoin worth $27.8 billion has become illiquid. Longer term investors are holding on to their BTCs, refraining from selling their assets.
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If long term holders continue to resist selling their BTCs, the dominant cryptomoney will become scarce and difficult to accumulate.
Such a trend would raise the long-term value of Bitcoin, feeding the ongoing upward cycle. Analysts explained:
„Over the course of 2020, a total of an additional 1 million BTCs have become illiquid: investors are moving more and more. This is bullish and suggests that the current bullish run has been driven (in part) 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 foreseeable future is the miners.
Kyle Davies, co-founder of Three Arrows Capital, said there is a shortage of ASIC miners. Normally, miners would deploy capital to acquire hardware like ASIC miners. But since they can’t buy, that could generate revenue at BTC. He said:
„There is a huge shortage of ASICs. The miners only need to sell enough bitcoin to cover existing operating costs in USD. They are encouraged to keep all the capital that would otherwise be invested in buying hardware, in $BTC“.
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The combination of multiple factors, such as increased HODLing activity, the likelihood that miners will sell less BTC and the fall in Bitcoin’s liquidity could further boost BTC’s momentum in the first quarter of 2021.