Analysis: Supply and demand factors push Bitcoin prices up in both directions, which will not stop retail investors from buying

By Scott Chipolina
Odaily Planet Daily Translator: Nian Yin Si Tang

summary
- The growing demand for Bitcoin has led to a supply crisis.
- Glassnode CTO Rafael Schultze-Kraft said the total volume of Bitcoin on exchanges has fallen 20% this year.
- But Schultze-Kraft also believes that this should not stop ordinary investors from buying in.

There are two key factors that influence the price of Bitcoin: supply and demand. While the available supply has been decreasing, the demand is rising rapidly.

Institutional investors and companies like MicroStrategy have been flooding the market, buying large amounts of Bitcoin, increasing demand. At the same time, data shows that the amount of Bitcoin available on exchanges has been falling sharply. And this has affected the market.

“Bitcoin is in the middle of a supply and liquidity crisis. Extremely bullish! And massively undervalued,” Glassnode CTO Rafael Schultze-Kraft recently tweeted. “I believe the price of Bitcoin will clearly reflect this in the coming months.”

This year, Bitcoin has risen 500% from a low of $4,000 in March to a new high of over $24,000 last week. Let’s take a closer look at two factors that may have contributed to this momentum.

Bitcoin is experiencing a supply crisis

While the total amount of Bitcoin has been increasing over time as more Bitcoins are mined every day, the available supply on exchanges (also known as liquidity) has been decreasing. This makes it more difficult or more expensive for new investors to buy Bitcoin.

Data from Glassnode shows that the supply of Bitcoin held on exchanges has fallen by 20% since January. This is a trend seen across all exchanges. Bitcoin may have been sent to long-term storage, custody solutions, or larger investment funds. But crucially, it means less tradability.

In fact, less than 13% of all Bitcoin currently exists on crypto exchanges and can be traded.

Glassnode also tracks the amount of liquid Bitcoin (freely tradable). Illiquid Bitcoin, on the other hand, is Bitcoin held outside of exchanges and cannot be purchased. Again, the amount of liquid Bitcoin is declining, with only 12% of the total supply being liquid.

“Illiquid entities spend less than 25% of the BTC they receive, becoming supply sinks in the network,” Schultze-Kraft said.

Just as Schultze-Kraft believes that the Bitcoin supply crisis will not exclude ordinary or retail investors, he also does not think it will prevent large institutional investors from buying more Bitcoin.

“If you look at the fundamentals, if you look at the infrastructure, if you look at the custody services, everything is moving forward,” he said, adding that the likelihood of institutional investors entering the market is clearly greater than in 2017.

First, almost a third of all Bitcoins are not in circulation. Nearly 15% of all Bitcoins are held in “accumulation addresses” by what Schultze-Kraft calls “real HODLers.” Adding this to the total amount of Bitcoin lost (generally estimated to be around 3 million), this means that about 30% of all Bitcoins are not actually usable.

However, what is more important is Bitcoin’s impending liquidity crisis. According to data from Schultze-Kraft, the supply of Bitcoin on exchanges has fallen by 20% since January. In other words, Bitcoin is increasingly being moved into long-term storage and away from exchanges.

Bitcoin has been increasingly leaving exchanges. Image source: Shutterstock

In addition, 14.4 million Bitcoins (equivalent to 78% of the total Bitcoin supply) are held by illiquid entities. Since only 12% of the total Bitcoin supply is held by liquid entities, this indicator shows that 2020 has created permanent pressure on Bitcoin's liquidity.

But Schultze-Kraft told Decrypt that the supply crisis shouldn’t stop regular investors from buying in: “I call it a supply crisis, and it will have an impact on prices, but it won’t necessarily stop retail or small investors from entering the space.”

His reasoning is that retail investors looking to enter the Bitcoin market can still buy into the cryptocurrency without taking up too much space.

“Yes, the supply is limited, but Bitcoin is still highly divisible,” he explained. “Even if a retail investor wants to get in, he can just buy one or two Satoshis.”

In turn, the price of Bitcoin would benefit. Schultze-Kraft told Decrypt that he believes that “ultimately, it’s just a matter of the market. If supply decreases but demand clearly grows, that will have a clear impact on the price.”

Just as Schultze-Kraft believes that the Bitcoin supply crisis will not exclude ordinary or retail investors, he also does not think it will prevent large institutional investors from buying more Bitcoin.

“If you look at the fundamentals, if you look at the infrastructure, if you look at the custody services, everything is moving forward,” he said, adding that institutional investors are clearly more likely to enter the market now than in 2017.

All of these factors combined will lead to a growing demand for cryptocurrencies.

Growing demand for Bitcoin

The growing acceptance of Bitcoin by institutional investors has increased the demand for the cryptocurrency in 2020.

Notably, Grayscale’s Bitcoin holdings have been growing at a faster rate than Bitcoin is mined (although some of this growth may be due to existing investors transferring their assets to Grayscale).

But Bitcoin buying really started to surge when business intelligence company MicroStrategy began investing in Bitcoin in August and September of this year. The company bought $425 million worth of Bitcoin during that period, and has since made further purchases. It has now accumulated $1.6 billion worth of Bitcoin.

Since MicroStrategy entered the Bitcoin space, many other companies have followed suit. This includes Square, which invested $50 million in Bitcoin in October, accounting for 1% of its total assets at the time.

That same month, PayPal announced it would be launching a bitcoin buy and sell feature. Arguably, this marked the most significant step in making bitcoin more accessible, as it made it easier than ever for PayPal’s U.S. customers to use bitcoin.

In fact, just two months later, about one in five PayPal customers were already using Bitcoin for transactions.

Let's look at the latest developments: The total amount of Bitcoin purchased by public companies, private companies, and ETF-like companies has reached about 1.1 million. At today's prices, this is equivalent to $25 billion, which accounts for almost 5% of the existing Bitcoin supply.

Along with these major decisions, Bitcoin has also received praise from heavyweights in the traditional financial field.

In May, Paul Tudor Jones, founder of Tudor Investments, said, “The best profit maximization strategy is to own the fastest horse,” adding, “If I had to make a prediction, I’d bet on Bitcoin.”

BlackRock Chief Information Officer Rick Rieder said in November that Bitcoin is "here to stay" and may surpass gold in the future.

And Guggenheim Global CIO Scott Minerd made the most bullish Bitcoin statement of the year just two weeks ago: "Our fundamental work suggests that Bitcoin should be worth around $400,000."

All of these headlines have given Bitcoin a legitimacy it never enjoyed before.

According to Schultze-Kraft, if supply decreases but demand increases significantly, this will have a significant impact on the price of Bitcoin.
But then again, no one knows for sure what the future of Bitcoin will be.