28.10.2021

Bitcoin has reached a “liquidity crisis”. What does this mean for cryptocurrency?

According to the research platform Glassnode, Bitcoin is becoming an increasingly scarce asset. In other words, it is now quite difficult to buy cryptocurrency in huge volumes, since there is not enough liquidity for very large-scale transactions on exchanges.

Liquidity in this case is the amount of free bitcoins from sellers on trading floors. In the long term, this trend could make the digital asset even more expensive due to the fixed supply.

Recall that the maximum number of bitcoins is strictly limited to 21 million units. Against the backdrop of sharply increased demand from institutional investors this year, the cryptocurrency has sharply demonstrated its qualities of a scarce asset. Yet it can be created according to strict rules and in very limited quantities. It is impossible to create all the coins in a day – it simply cannot be because of the peculiarities of the cryptocurrency code.

The BTC rally, fueled by large institutional investors, will be even brighter in the future due to an influx of new hobbyist investors who have not yet fully embraced the new trend.

We have checked the actual data, and so far the advantages of the scarcity of this asset seem obvious. Tonight, the Bitcoin exchange rate broke the $ 29,000 mark, which happened for the first time. Now the cryptocurrency is trading in the $ 29,034 zone, which is 1.7 percent ahead of the daily result.

The market capitalization of the asset is currently $ 539 billion.

Why Bitcoin is a good investment

In 2020, concerns about the collapse of the global economy amid the coronavirus pandemic forced investors to look for “safe assets” in which to wait out the crisis. Due to the nature of the cryptocurrency, their choice fell on Bitcoin.

Over the past months, several large organizations have made large investments in BTC at once, while the cryptocurrency has received dozens of laudatory comments from famous billionaires. The trend, which began with MicroStrategy’s $ 425 million purchase of bitcoin in the summer, has spilled over to other financial giants. In the end, PayPal, Square and even insurance conglomerates like MassMutual entered the fray. That is, the trend turned out to be very strong, and large companies simply did not manage to resist it.

Consequently, the institutional accumulation of cryptocurrency has accelerated significantly in recent times. Glassnode found that at least 4.2 million BTC is in constant circulation for buying and selling. Here is an expert quote from Cointelegraph.

Bitcoin liquidity is defined as the average ratio of received and spent bitcoins between network participants. Currently, 14.5 million BTC are classified as illiquid, leaving only 4.2 million BTC in permanent circulation available for buying and selling.

At the same time, experts determined that an additional million bitcoins became illiquid in 2020, which means that the trend of long-term storage of coins is very popular among investors. In this regard, analysts believe that the current rise in the BTC exchange rate is, among other things, provided by the asset liquidity crisis. That is, even if large players want to buy tens of thousands of bitcoins, they may face a certain shortage of coins – albeit not final.

In addition, analysts noted that the growth in the illiquid supply of bitcoins against the background of a decrease in the number of liquid BTC coins is characteristic of the growth stages of the cryptocurrency market. In 2017, the same was observed. Here is a graph that confirms this.

Over the past 12 months, $ 27.8 billion worth of bitcoins have become illiquid. Long-term investors are holding onto their BTC by refusing to sell the digital asset. If this continues further, the main cryptocurrency will become even more scarce. This trend will drive up Bitcoin’s value over the long term, fueling an ongoing bullish growth cycle. Here is a quote from analysts.

Over the course of 2020, a total of one million additional BTC became illiquid – investors are increasingly unwilling to part with the coins. Because of this, the current bullish trend was (in part) triggered by the new Bitcoin liquidity crisis.

We believe that the current situation is indeed positive for Bitcoin. Users actively store their own cryptocurrency and do not plan to part with it in the near future. Accordingly, they expect to increase the rate in the future.

At the same time, they reduce the supply of free coins on the market, which, while maintaining demand, is obliged to raise the value of the asset. Actually, this is what we have seen in the past few months. It remains to be hoped that the trend will continue in 2021.

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