key takeaways
- Long-term holders are hoarding bitcoin, with two-thirds of the supply being stablecoins for over a year
- Our head of research, Dan Ashmore, writes that liquidity on the demand side is also drying up, with order books thin and stagnant stock exchanges fleeing
- This will increase volatility in the short term, leaving bitcoin open to aggressive moves both up and down
- The long-term impact of the dwindling supply is a separate discussion, but for now, the already risky crypto markets are at risk.
a lot is demanded Bitcoin, Are institutions calling it quits after the disastrous 2022 event that saw the entire crypto sector go up in flames? Is the market pulling back now that interest rate forecasts have softened after consecutive rate hikes over the past year?
But rather than demand, it is the supply of bitcoin that is often more intriguing to watch. With a fixed limit of 21 million coins, bitcoin’s supply schedule is coded into the underlying blockchain. This quality has given rise to a million different theories surrounding bitcoin’s future place – and value – in the world.
But there’s another interesting analytical angle to bitcoin: before the anonymous Satoshi Nakamoto launched bitcoin in 2009, there had never been an asset in the world that provided so much visibility on supply distribution. The nature of blockchain is that, while individual holders are anonymous, the distribution of all coins is available for the world to see at all times. So, let’s take a look.
Long term holders hoarding bitcoin
Central to the long-term thesis of many bitcoin bulls is the idea that long-term holders will suck up the supply, driving the price up.
Looking at current holdings, two-thirds of the supply hasn’t moved in a year. This is definitely a big number, and we’ll get into what it means in the next paragraph. Moving further down the timeline, more than half of the supply (53.6%) has been stable for over two years, 39.7% have not moved in 3+ years, and 28.6% have been inactive for 5 years or more.
What does this mean for the price?
These are huge numbers by any means. It is impossible to compare them to other asset classes, given that none are trackable on a ledger such as the blockchain. Perhaps only commodities like precious metals can compete with the above numbers, even then this is just speculation.
But what does it mean? Is this a bullish sign? Well yes and no. The immediate conclusion is that less supply means less demand is needed to push the price up, and the cap at 21 million bitcoins certainly means that if demand keeps rising, the price has nowhere to go but up. .
However, there are mitigating factors here. The first reality is that some of the above “long-term holders” are really just lost coins, whether through people who have passed away, forgotten about their coins or lost access to their wallets. .
Bitcoin creator Satoshi Nakamoto is one of them, the mysterious enigma holding around 1.1 million bitcoins, which is equivalent to 5.2% of the supply. None of its coins have circulated since bitcoin was mined back in the first eighteen months of its existence.
Not to get too tangential, but below is the value of Nakamoto’s holdings over the past 13 years, estimated to have hidden 1.1 million bitcoins since mid-2010. He Very of capital which holders must surely expect will never flood the market.
Increasing volatility with low liquidity
Regarding the impact of these large shocks of bitcoin being “removed” from circulation, the biggest impact – for now, may be on volatility rather than price.
In the following chart, I have plotted the amount of bitcoin currently sitting on exchanges at a 5-year low.
Not only is the volume of bitcoin on exchanges declining, but stablecoins are doing the same. More than half of the stablecoins have flooded exchanges since December.
This means that liquidity is thin on both the demand and supply side of bitcoin – and the same conclusion would be drawn if the order book were downloaded from the exchange. Liquidity has been extremely low, especially since FTX moved in November.
This lack of liquidity only serves to increase the already skyrocketing volatility in the bitcoin market, both up and down. This is part of the reason volatility has recently reached its highest level. mid 2022And also a factor in bitcoin’s massive run-up this year.
By definition, it takes less time for a thin market to move, and with forecasts of the future path of monetary policy changing to a more optimistic stance in recent months, bitcoin has moved with minimal resistance in its path.
While the supply-side drying up is intriguing in the long term, watching it in relation to bitcoin’s future performance is a different discussion altogether. In the short term, capital has fled the crypto markets at an unprecedented pace, and we are now at a place where the market is ready for violent moves in any direction. As always in crypto, the short term is difficult to predict, however, and risks remain extreme – perhaps even more so than currently normal.