In the ever-evolving world of cryptocurrencies, Bitcoin stands as a digital giant, continuously capturing the attention of investors, institutions, and regulators. This digital currency has recently found itself at the center of a gold rush, with requests for a Bitcoin Exchange-Traded Fund (ETF) flooding regulatory authorities. However, beneath the surface of this growing interest lies a fundamental question: How many Bitcoins are actively circulating and available for sale in the current market?
In this comprehensive report, we embark on a journey to dissect the complex dynamics of Bitcoin supply, not only to measure the available stock but also to analyze how demand has been a central force in shaping Bitcoin valuations across past market cycles.
To shed light on this situation, a deep examination of funds flowing into major cryptocurrency exchanges in the United States and Asia must be carried out. The findings paint a vivid picture: while a substantial amount of Bitcoin is being accumulated during the trading hours in Asian markets, the United States appears to exhibit comparatively weaker demand in the early stages of 2023. This observation serves as a catalyst for the utilization of a unique framework focused on the concept of ‘hot supply.’ This framework aims to identify periods of demand expansion or contraction by isolating the volume of coins actively participating in the price discovery process.
Regional Analysis
In recent weeks, the U.S. Securities and Exchange Commission (SEC) has exerted increasing pressure on the country’s two major cryptocurrency exchanges. However, as if in direct response to this regulatory scrutiny, a wave of requests for spot Bitcoin ETFs, led by BlackRock, the world’s largest asset manager, has stormed into the cryptocurrency landscape.
The immediate consequence of this influx is a notable increase in the price of Bitcoin, catapulting it from $25,000 to over $31,000, reaching new annual highs. This surge was primarily driven by traders in the United States, closely followed by their counterparts in Europe and, finally, Asia. To provide further insight into these regional shifts, an examination of coin flows through fiat onramps could be conducted, focusing on the three major exchanges in the United States and Asia. Our analysis reveals a series of intriguing patterns within Bitcoin’s net flows.
During the early stages of the 2020–2021 bull market, events such as the LUNA collapse and the FTX debacle initiated a significant accumulation regime and fostered a preference for self-custody. In particular, most exchanges experienced daily net flows of 5,000 to 10,000 BTC during this period. However, Binance, one of the world’s largest exchanges, exhibited a contrasting pattern, where large inflows coincided with market sell-offs and downtrends.
This phenomenon could be attributed, at least in part, to investors moving their holdings from exchanges perceived as riskier, such as FTX, to the relative safety of the world’s largest exchange. Further categorization of exchanges by their geographical location (in the United States or in Asia) provides additional insights. Monthly cumulative data on net flows shows fluctuations in market sentiment: both regions saw net outflows, indicative of accumulation, during the early stages of price discovery from November 2022 to January 2023.
In contrast, after the LUNA collapse and throughout most of 2023, overseas exchanges recorded net inflows, while U.S. exchanges exhibited net outflows, as U.S.-based investors continued to accumulate or remained neutral.
Measuring Demand through Hot Supply
Recent reports have highlighted the ongoing transformation of wealth, with investors progressively moving from short-term holdings to long-term HODLers. This growing lack of liquidity has historically been a feature of Bitcoin bull markets.
However, while such a ‘supply shock’ can undoubtedly have a positive impact on price discovery, the sustainability of this trend depends on the influx of new demand in the cryptocurrency market.
Recognizing the critical role of demand, we introduce a comprehensive framework to track the expansion or contraction of demand using on-chain metrics. Our goal is to measure supply momentum as a demand proxy. To achieve this, we explore changes in the size of the highly active region of the circulating supply, defined as ‘young supply,’ comprising all coins moved in the last 155 days and with a high probability of being spent in the near future.
Furthermore, we delve deeper, isolating the most liquid and highly active subset of this young supply: ‘Hot Supply.’ Hot Supply is characterized by a velocity metric of one or more, meaning that, on average, each coin within this subset moves more than once a day.
The data is revealing; it shows that both perpetual futures markets and sub-one-week supply exhibit a velocity metric greater than one. However, as we move to the one-month age range, Velocity drops below one.
This underscores the idea that older coins are less likely to be spent in the near future. To put the magnitude of this hot supply into perspective, we compare it to Perpetual Open Interest, Total Circulating Supply, and Likely Lost Supply.
What becomes evident is that the Bitcoin price discovery process has historically been driven by a relatively small fraction of the total circulating supply.
Hot Supply, with an average size of 0.67 million BTC and a maximum of 2.2 million BTC, represents approximately between 3.5% and 11.3% of the total supply. This is similar to the volume of ‘likely lost coins,’ i.e., those that have not been touched since the early days of Bitcoin, amounting to 1.46 million BTC or approximately 7.2% of the total supply.
Perpetual Open Interest, with 472,000 BTC, is surprisingly similar in size to Hot Supply, which stands at 511,000 BTC. This analysis points to a substantial volume, approximately 983,000 BTC (equivalent to $29.5 billion), currently ‘available’ for sale, with just under half of this amount made up of spot BTC.
The interplay between price action, changes in hot supply, and perpetual open interest is both fascinating and impactful.
We conclude by highlighting the resurgence of demand led by the United States, driven by the increase in ETF requests. This follows a period of relatively weaker demand in the United States in 2023, with major exchanges in Asia experiencing the most significant accumulation.
In a market marked by growing institutional interest, the available volume of BTC supply and the expansion or contraction of new demand emerge as critical factors influencing Bitcoin’s price dynamics.
Summary:
- The concept of ‘supply shock’ can have a positive impact on price discovery.
- The sustainability of this trend depends on the influx of new demand in the cryptocurrency market.
- A unique framework focused on the concept of ‘hot supply’ can identify periods of demand expansion or contraction.
- Changes in the size of the highly active region of the circulating supply, known as ‘young supply,’ can serve as a demand proxy.
- Hot Supply refers to the most liquid and highly active subset of the young supply.
- This subset exhibits a velocity metric of one or more, indicating frequent movement of coins.
- Price action, changes in hot supply, and perpetual open interest are fascinating and impactful.
- They play a crucial role in Bitcoin’s price dynamics.
- Recent increase in ETF requests has led to a resurgence of demand, particularly in the United States.
- Major exchanges in Asia have also experienced significant accumulation.
- Bitcoin’s price dynamics are influenced by the available volume of BTC supply and the expansion or contraction of new demand.
- Growing institutional interest in the market adds to the complexity of these dynamics.
Source: Glassnode
© 2024 Cryptopress. For informational purposes only, not offered as advice of any kind.
