Bitcoin investors chasing fewer sellers & dwindling supply

Crypto market cap has crossed the $1 trillion-mark as BTC price continues to skyrocket amid an extreme buying frenzy

There’s no letup in the mammoth crypto rally led by Bitcoin, as the premier digital currency charts a newer all-time high (ATH) by taking out another psychological barrier of $40k. Hard to imagine that the BTC price was hovering around $10k, only about a couple of months ago. However, the bigger news was another landmark that the crypto market hit yesterday — achieving a collective market cap of $1 trillion.

At the time of writing, it stood at $1.059 trillion. Bitcoin has not been the only cryptocurrency on a roll lately — Alt. coins have also started to show some strength as an investment in BTC has gotten too expensive for many. The leader of Alt. coins, Ethereum has come alive with the onset of the new year. I discussed in my last piece how various factors might greatly benefit the second largest crypto in 2021.

Coming back to the crypto market cap, it has been a tremendous journey for the digital assets as they started their ascent in 2017 (chart below). The first crypto market bubble in late 2017 saw the total market cap to jump to as high as $800+ billion before a three-year bear market ensued. The change in fundamentals for Bitcoin and the broader crypto market this time around has now taken it comfortably over the $1 trillion mark with a lot of upside potential. And a lot of the contribution is coming from institutional investors.

Talking about institutional traders, I have said on multiple occasions about how they have been the driving force behind this recent surge in BTC price. The amazing thing, however, has been the sustained bullish momentum that we have seen in this rally. It just doesn’t seem to let up. And this is exactly what we will analyze today. The data for the following charts was taken from Chainlysis Market Intel. The pace of 2021 is being set as speak.

Bigger Buyers, Fewer Sellers

Figure 1

Recent Bitcoin inflows to exchanges have flattened (Figure 1), signifying that the numbers of sellers are decreasing as the price charts new heights. According to demand-supply economics, if the supply dries out, the demand pushes higher, and so does the price. This is exactly what we are seeing playing out in Bitcoin. As major institutional investors scramble to take up larger positions in BTC, dwindling supply and lack of sellers are pushing the price to new highs.

Higher Fiat Bitcoin Purchases

Figure 2

Most of the buying in this rally seems to have come from Fiat currencies. As seen in the chart above (Figure 2), Tether's (biggest stable coin) inflows to exchanges in December were only enough to purchase 34% of bitcoin inflows — below the 39% average for 2020. Needless to say, much of the infusion of cash came from outside the crypto ecosystem — again an indication that dollar-backed external players like big institutional investors were involved.

$10k+ Bitcoin Withdrawals

Figure 3

According to the report, the total number of bitcoin withdrawals from exchanges decreased by 19% in December relative to the prior 3-month average. This decline came from withdrawals of less than $10,000 worth of bitcoin, which fell 22%, while withdrawals of more than $10,000 worth of bitcoin increased by 9% in December relative to the prior 3-month average. Similarly, Withdrawals of more than $1 million worth of bitcoin increased by 32% (Figure 3). All this data signifies that institutional investors and not the smaller retail traders are driving the current rally.

Bitcoin flowing to ‘Whales’

Figure 4

For those of you who are still not familiar with the term ‘Whales’, it is associated with bigger investors. The chart above (Figure 4) highlights how Bitcoin received by Whale wallets (holding more than 1,000 BTC) increased proportionately to the increase in BTC price. In the last week of December, this reached 2020 high — 731k bitcoin flowing from exchanges to whales. This is a third of all withdrawals from exchanges. So the whales were again major buyers of Bitcoin over the holiday period, looking to hold the investment rather than liquidating it.

New Investors acquiring Bitcoin

Figure 5

And finally, this chart (Figure 5) tracks the cumulative change in bitcoin held by traders, longer-term investors, and new investors. According to the underlying trend, Bitcoin has flowed to new investors from traders and, more recently, longer-term investors. Since July, investors have bought 760k bitcoin from traders, reducing the amount of liquid bitcoin available to buy. Keep in mind, that investors usually hold on to more than 75% of the bitcoin they receive. This subsequently causes a shortage of supply in the market, pushing the prices higher.

The amount of bitcoin held by traders has declined steadily since July when the price crossed $10k and started to rise. While the 3+ month investors (yellow line) remained steady, < 3-month investors began to increase their BTC holding, gradually drying out the traders (pink line). From mid-November onwards, the price increase didn’t result from the Bitcoins supplied by the traders. In fact, Bitcoin started to move out of longer-term investor wallets (orange line) into new investor wallets.

This was the time when BTC started to take a vertical trajectory — mainly because longer-term investors likely required a higher price to part with their bitcoin as compared to the short-term traders who were willing to pay them that price. The extraordinary increase in price shows just how steep the supply curve of bitcoin available in the market is right now.

And since the total supply of Bitcoin is capped anyway, the steepness of the supply curve is going to play a major part in the price movements going forward as well. Volatility has always been a feature of Cryptos since the beginning and will remain in play, but it looks like another great year is shaping up for the digital assets.