In the letter
- Most Bitcoin is not in circulation, according to a new report.
- This is because it is bought by entities that do not want to sell it.
- But it could help push up the price of the cryptocurrency, analysts tell Decrypt.
Most Bitcoins are illiquid – 78% of them – and this is behind the current uptrend, according to a new report.
Bitcoin’s “liquidity” refers to the amount of assets in circulation. According to the results released yesterday by blockchain analytics firm Glassnode, only 4.2 million Bitcoin (22%) is currently available for purchase and sale.
The report states that there is a shortage of Bitcoin because it is captured by big investors. This trend makes money more expensive.
“If many bitcoins are illiquid, a supply crisis emerges, which has a weakening effect on the selling pressure of BTC in the market,” says Glassnode. “Or in other words: a sustained rise in illiquid bitcoin is an indication of a strong sense of investor tolerance and a potentially bullish signal.
The report notes that long-term investors holding the cryptocurrency are removing it from circulation. 2020 was the year large companies have entered the crypto space –in particular the business intelligence company MicroStrategy– and they buy Bitcoin and hold it as a long-term investment.
According to Glassnode, these companies are unlikely to sell, which is what drives the current bull market. In fact, this year alone, “over a million BTC has gone illiquid,” the report says.
But is it a good thing? What does this mean for the average investor? Pedro Febrero, analyst at Quantum Economics, said Decrypt that Glassnode’s findings were “superb news”.
“Essentially, when the supply of bitcoin is removed, the price tends to increase, as the demand stays the same or increases,” he said.
“And we know for sure that demand is indeed increasing. If only 22% of all Bitcoin is in circulation and wealthy individuals continue to acquire Bitcoin, it is impossible to say how much the price can go up.
A cryptocurrency shortage isn’t necessarily a bad thing: it will never go away.
The report adds that Bitcoin liquidity and the price of the currency go hand in hand – and if things continue as they have been this year, the price will only continue to rise.
So there you have it: less Bitcoin is more.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.