Imagine you are sitting in an Economics 101 class as a college freshman. The first thing you will learn may be the concept of supply and demand. You have scarcity when the demand is high and the supply is low. Of course, scarcity leads to higher prices.
The Economics 101 class comes in handy with bitcoin because the data shows that scarcity is the major catalyst that’s pushing bitcoin’s price into all-time highs. Case in point: Nearly 80% of BTC is actually illiquid on the market for multiple reasons. And here’s why this trend will only continue — thus pushing bitcoin’s price even higher in the future.
Investors Are Hoarding Bitcoin More Than Ever
In the last 12 months, Bitcoin captivated the financial world with a surge of almost 535%. As a result, many investors assume that people are gambling bitcoin like they’re at a blackjack table. Sharing the sentiment, Berkshire Hathaway’s Charlie Munger said he “hates” bitcoin’s success.
Well, here’s the hypothesis. If investors are trading bitcoin hand over fist, the amount of bitcoin available on the exchanges should stay on a high level. After all, high-frequency traders would keep bitcoin on an exchange to execute trades. Now, let’s look at the total bitcoin held on major cryptocurrency exchanges — such as Coinbase, OKCoin, and Binance. The chart below shows that a bulk of investors are actually taking bitcoin out of Exchanges and stashing them into safe places:
As you can see from this chart, there are only about 2.4 million bitcoin on all Exchanges. What’s more, it has plummeted more than 20% in the last 12 months. This data hints that investors have a long-term view of bitcoin, and they are holding bitcoin near to their hearts.
Liquid Vs. Illiquid Bitcoin
The next chart shows the gap between liquid and illiquid bitcoin is growing at an accelerated pace. But first, how do you measure liquidity? Bitcoin liquidity is defined as the average ratio of received and spent BTC across entities. In other words, liquidity is measured by the average number of bitcoin in constant circulation. The data shows that a stunningly-high 14.5 million bitcoin are classified as illiquid — leaving only 4.2 million bitcoin in constant circulation that is available for buying and selling.
In short, only 22.4% of bitcoin is liquid and available to trade. Take a look at the 12-year chart from 2009 to 2021:
As you can see, illiquid bitcoin is growing at an accelerated rate. Economics 101 says that scarcity leads to higher prices, right? Here are three reasons why scarcity may grow, and there’s room ahead for bitcoin to move.
REASON #1: Key Endorsements. Financial influencers — such as Paul Tudor, Cathie Wood, and many others — have been touting investors to buy and hold bitcoin. They call it a “million-dollar” investment opportunity. As a result of the public’s awareness about bitcoin, it has become politically viable for corporations to hold bitcoin on their balance sheets. This is an enormous catalyst for higher scarcity in bitcoin.
REASON #2: Rising Number Of Corporations Holding Bitcoin. Five years ago, proposing the idea of a $650+ billion corporation holding nearly 8% of their balance sheet in bitcoin would get you laughed out of the boardroom.
Times have changed, however. Elon Musk’s Tesla currently holds about $2.48 billion of bitcoin, as of the end of March. Other notable corporations holding bitcoin are Jack Dorsey’s Square ($400+ million) and Michael J. Saylor’s MicroStrategy ($5.25+ billion). The rising acceptance of a corporation’s strategy of holding bitcoin on the balance sheet may further crush the liquidity of bitcoin.
REASON #3: Miners Are Holding Onto Bitcoin As Well. Another bitcoin scarcity factor is miners’ strategy of holding digital assets instead of selling. According to blockchain data, miners are at a positive net position change and this trend has started occurring since the final month of last year. A positive net position means that miners are holding more bitcoin (positive), rather than selling and reducing the number of bitcoin in their accounts (negative).
So, when new bitcoin is released from the untapped supply, the majority of them stay in miners’ accounts and don’t go into circulation immediately.
How High Can Bitcoin Go?
Cryptocurrencies are becoming a legitimate financial asset and bitcoin is taking the lead. With a reported 4.9 trillion in assets under management, the top tier brokerage Fidelity has recently filed for regulatory approval to offer a bitcoin exchange-traded fund. To be sure, the growing scarcity of the world’s most valuable crypto coin, which hit an all-time high of $65,000 in mid-April, is among the biggest bullish factors behind investors’ enthusiasm.
And some market pundits believe that bitcoin will break the $100K level by the end of this year:
Mike Novogratz, founder and CEO of Galaxy Digital: Billionaire bitcoin bull Mike Novogratz believes that the cryptocurrency industry remains in its early days, and bitcoin will hit $100,000 as soon as next year. “Right now, total crypto wealth is roughly $2 trillion, so that’s one half of 1% of all wealth. If you don’t think in the next two to three years that can be 2% to 3%, you’re not paying attention to the trends,” Novogratz said.
JP Morgan Chase: The banking giant recently revised its bitcoin price outlook to $130,000 amid declining volatility as well as the change in correlation between bitcoin and other assets. “The recent change in the correlation structure of bitcoin relative to traditional asset classes” will likely increase the institutional adoption of bitcoin, JP Morgan Chase said.
Cathie Wood, ARK Invest CEO: Star fund manager Cathie Wood is relentlessly bullish on bitcoin. She said that Bitcoin’s trillion-dollar valuation isn’t close to where it might be in the near future. “If we add all of the potential demand relative to the limited supply, we come up with incredible numbers over the long term. We have just begun. One trillion dollars is nothing compared to where this ultimately will be,” she said at a CBOE panel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.