Bitcoin's Shrinking Liquid Supply: An Unfolding Reality and its Implications

A New Era Post-Halving

Ever since the third Bitcoin halving event in May 2020, a fascinating trend has been unfolding in the crypto landscape. The halving event, which occurs every four years, reduces the number of new bitcoins created and earned by miners by half. This time, it set off an unexpected trend: the steady decrease of Bitcoin's liquid supply on exchanges.

Bitcoins liquid supply (blue) is decreasing since the 3rd halving.

The Fall in Liquid Supply: What Does it Mean?

In essence, the liquid supply of Bitcoin refers to the amount of Bitcoin readily available for buying, selling, and trading on exchanges. A decline in the liquid supply means fewer bitcoins are available in the market for immediate transactions, an occurrence that's been gathering steam since the last halving event. But what are the reasons behind this decline?

Factors Contributing to the Decrease

Less Emission than Newly Mined Bitcoin

The third halving event cut the reward for mining new blocks from 12.5 to 6.25 bitcoins. As a result, the amount of new Bitcoin entering the market decreased significantly. This reduced emission rate means that fewer new bitcoins are available for trading, contributing to the decrease in the liquid supply.

HODLers Not Selling

Another factor is the behavior of Bitcoin holders, colloquially known as "HODLers" in the crypto community. Many Bitcoin owners are choosing not to sell their assets, opting instead to hold onto their Bitcoin in anticipation of future price increases. This behavior removes a significant amount of Bitcoin from the circulating supply, making it unavailable for immediate trading.

Increased Self-Custody

Lastly, the trend towards self-custody—where individuals hold their Bitcoin in personal wallets rather than keeping them on exchanges—has been on the rise. This further reduces the liquid supply as more Bitcoin is moved off exchanges and into private wallets.

A Look Into the Future: What Might Happen?

As Bitcoin continues to mature and gain mainstream acceptance, it's likely that the liquid supply will continue to decrease. This future projection is based on the current trend and the understanding that the factors contributing to the decline are unlikely to change in the near future.

Implications of a Less Liquid Market

A decrease in the liquid supply of Bitcoin could lead to a more volatile market. With fewer bitcoins available for buying and selling, price swings could become more drastic as demand fluctuates. This could potentially lead to higher price peaks and steeper falls. Furthermore, a less liquid market could make Bitcoin more akin to a store of value, similar to gold, rather than a medium of exchange. This could influence the way people use and perceive Bitcoin, potentially solidifying its status as "digital gold."

Conclusion: An Unfolding Landscape

The ongoing decrease in Bitcoin's liquid supply presents an interesting scenario for market participants. While it poses challenges in terms of market volatility, it also offers opportunities, particularly for those who see Bitcoin as a long-term investment. As always in the dynamic world of cryptocurrency, the key to success lies in staying informed and being prepared for change.