It’s usually difficult to predict why and when the price of bitcoin will rise or fall. This analysis becomes much easier with the benefit of hindsight. The rise of bitcoin from $10,000 to $64,000 from September 2020 to March 2021 is a great example.
We were in the midst of the pandemic, and the central bank was pumping money at unprecedented levels. We also had the bitcoin halving in May of 2020, which reduced the daily incoming supply to 900 bitcoin. This set the stage for one of the most spectacular price rises in bitcoin history.
The bitcoin halving created a supply shock, but we also saw a demand shock in Q3 and Q4 of 2020, which is a lesser known fact. First, Michael Saylor and MicroStrategy began purchasing bitcoin in the billions of dollars.
Hedge funds and family offices were pouring billions of dollars into the GBTC arbitrage trade at the same time.
This was significant because MicroStrategy was solely a buyer in the market, with no plans to ever sell their bitcoin. GBTC is similar in that they do not have a redemption function, which means they can only buy and do not have the ability to return the 3% of circulating supply held in their fund to the market.
While these demand shocks were playing out, bitcoin holders made the bitcoin supply highly illiquid. As of September 2020, nearly 65 percent of bitcoin’s circulating supply had not moved in over a year. Because of the supply and demand shocks, the bitcoin price had to rise to accommodate everyone. This is why, between September 2020 and March 2021, bitcoin rose from $10,000 to $64,000.
So, how does this relate to the current state of the bitcoin market?
We appear to be witnessing a repeat of the same situation. The illiquid supply of bitcoin is now at an all-time high.
By Dylan LeClair
The amount of bitcoin on cryptocurrency exchanges that could be sold into the market at any time is at a multi-year low.
As these markets become more illiquid, demand for them is increasing significantly. The Terra ecosystem, in particular, is purchasing billions of dollars in bitcoin to put into the reserves of their UST stablecoin.
When an illiquid market meets a daily bid of around $125 million, the price must move upwards to accommodate everyone. To put things in context, Terra is purchasing approximately 300 percent of the daily supply of bitcoin issuance.
The block reward currently pays bitcoin miners around $43 million per day to secure the network. Terra is spending about $125 million per day. Because there is simply not enough bitcoin to meet demand, the price is steadily increasing.
Although history isn’t always a good predictor of the future, the bull run from 2020 to 2021 is an example of what can happen when demand outstrips supply. If you haven’t been paying attention to market developments, now is a good time to start.
Credit : Dylan LeClair, Patrick Hansen, GlobalCrypto.Exchange