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Crypto News Updates

Is There A Bitcoin Supply Shortage?

Utilizing comparisons with previous cycles can help us better understand the current exchange supply situation.

Is there a bitcoin supply shortage on exchanges?

Yes and no.

The bitcoin balance on exchanges has received a lot of attention during this bull run because the change in these balances sticks out. In previous bull runs, what can be observed is that, often, with bitcoin’s price increasing, the bitcoin balance on exchanges has increased. This can be seen in Figure 1 where Glassnode has compiled the addresses of spot exchanges holding bitcoin and aggregated them.

Even with bitcoin’s price going sideways or down, historically, the trend has been upward. This trend has reversed during this bull run, and since March 2020, the bitcoin balance on exchanges has been in a declining trend. This trend has been going on for over a year now. Compared to that in, or right before, the last bull run, the fall in exchange balance from July to December 2016 lasted only six months, before taking off in 2017 with bitcoin’s price taking off as well. If the underlying dynamics have not changed, and the exchange balance drop in 2016 and what followed in 2017 is an indication, the prolonged decline in exchange balances this time might be a set up for a major bull run. This is not the topic of this article, but that trend is majorly driven by outflows from Coinbase and thus highly likely by institutional and large investors. This indicates that bitcoins might not flow back to exchanges in bigger amounts any time soon before hitting this cycle’s top. So the patterns might not repeat as in 2016/2017, and bitcoin could hit a new all-time high with the bitcoin balance on exchanges declining.

Figure 1. Bitcoin: Balance on Exchanges (Stacked) August 17, 2011–April 19, 2021

Opposed to Coinbase, for example, Binance has seen strong inflows of bitcoin more recently. This is most likely retail depositing bitcoin on Binance to trade altcoins.

The general bitcoin supply drop on exchanges has led many people in the community (myself included) to talk about a supply shortage or even supply squeeze of bitcoin that will lead bitcoin’s price to inevitably shoot up at some point, when supply dries up. While it is true that bitcoin’s supply is dropping, once you look at the supply held on exchanges in USD terms the picture looks a bit different. In Figure 2, both the bitcoin balance on exchanges and the bitcoin balance on exchanges in terms of USD is shown from 2017 onward. From the first glance at the graph, it appears that, in USD terms, we can’t really talk about a supply shortage, let alone supply squeeze on exchanges. With bitoin’s price taking off in 2020, the supply on exchanges in USD has also been shooting up.

Figure 2. Bitcoin balance on exchanges in BTC and in USD January 1, 2017–April 19, 2021. BTC Balance on exchanges (Source: Glassnode), BTC price in USD (Source: Investing.com)

Though the supply increase in USD terms this halving cycle looks impressive, particularly compared to that in 2017, it is also interesting to look at the changes in relative terms. In Table 1, you can see the minimum and maximum exchange balance during halving cycle 1 (November 28, 2012–July 8, 2016), halving cycle 2 (July 9, 2016–May 10, 2020) and the present halving cycle that started on May 11, 2020.

I have calculated how much the supply has increased from the minimum to the maximum 344 days into each halving cycle; as of the time of this writing, we are now 344 days into the third halving (April 19, 2020). You will notice that, in cycle 1, the increase has been quite massive compared to the other ones. As I show in my article, “Halving Cycles and the Bitcoin Price,” cycle 1 has been rather exceptional in terms of price performance, so that number does not seem that relevant as a guide.

The changes in cycle 2 are more relevant, however. In the present cycle (up until the current date, April 19, 2020), the supply in USD went up roughly six times, while in cycle 2, it increased by nearly eight times. This seems to be a substantial gap, as the gap not only is influenced by the bitcoin balance on exchanges but also by the increase in prices. While the drop in bitcoin balances on exchanges is increasing that gap, an increase in bitcoin’s price is narrowing it. In the present cycle, bitcoin is outperforming cycle 2 price-wise. Now 344 days into this cycle, bitcoin’s price increased by nearly 550%, while in cycle 2 it only increased by roughly 307% over the same time span. This means that the gap would have been much bigger with a similar price performance as in cycle 2.

Table 1. Exchange Supply Calculations in USD terms for the halving cycles 344 days into the cycle. BTC Balance on exchanges (Source: Glassnode), BTC price in USD (Source: Investing.com)

To account for that, I have calculated the exchange balance gap for this cycle by adjusting for cycle 2 prices in Table 2. The minimum balance in USD terms on exchanges coincides with day one of this halving cycle. At that time, there were roughly 2,888,135 bitcoin on spot exchanges. This amount of bitcoin is then multiplied by the price of bitcoin at day one during cycle 2. This gives us an idea of how much the minimum balance on exchanges would have been in terms of USD at cycle 2 prices. I have done the same for the maximum balance on exchanges. The maximum balance on exchanges in terms of USD this cycle has been on day 338 with roughly 2,395,780 bitcoin, which is substantially lower than on day one. I have now multiplied this amount of bitcoin with the price of bitcoin 338 days into cycle 2. With that, I have minimum and maximum numbers that are adjusted for cycle 2’s prices. These allow me to calculate a hypothetical supply change and to calculate the supply gap between both cycles. Adjusted for cycle 2’s prices, the supply on exchanges in USD terms has only increased roughly 3.8 times versus 6.1 times without adjustments. This is a large difference. Compared to the nearly eight times increase in cycle 2 from Table 1, we can really begin to speak about a bitcoin exchange balance supply shortage here.

Table 2. Present Cycle Statistics Adjusted for Cycle 2 Prices. BTC Balance on exchanges (Source: Glassnode), BTC price in USD (Source: Investing.com)

While other factors at play could explain the difference in price performance of the two cycles, the drop in bitcoin supply on spot exchanges is majorly driven by large-scale investors and Coinbase seems to play a key factor.

To conclude, purely looking at the bitcoin balance on exchanges, we can observe a clear trend in this cycle where the supply keeps falling. On the other hand, looking at bitcoin’s supply in USD terms, the trend is upward, driven by bitcoin’s price performance. This price performance is, of course, not externally driven and influenced by the supply on exchanges. As I have shown, the gap in USD terms is already substantial without adjusting for prices and, after adjusting for cycle 2 prices, the supply gap in USD terms becomes very large (an increase of nearly eight times in cycle 2 versus an increase of less than four times this cycle). So, once we look at relative terms between the present cycle and cycle 2, there also seems to be a supply shortage in USD terms and not only in terms of bitcoin. Following this, the bitcoin balance on exchanges is an essential metric during this cycle, which warrants a closer look to see where bitcoin is headed next and, as explained earlier, could be a potential setup for a major bull run.

This is a guest post by Jan Wuestenfeld. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

How Monetary Policy And Dollar Devaluation Are Driving Institutional Interest In Bitcoin

In the second half of 2020, institutional investors increasingly started to show an interest in bitcoin. More and more investors have announced that they have allocated part of their cash reserves or a share of their fund toward bitcoin

The most prominent one certainly has been Michael Saylor with his company MicroStrategy holding 70,470 bitcoin as of now. Another important development has been MassMutual Life Insurance Company converting a share of its fund into bitcoin. Particularly, the latter example has given much more legitimacy to bitcoin as an institutional investment asset. An insurance company that deems bitcoin safe enough to invest in is a game changer, as this industry is usually known for its very conservative investment strategies. 

The inflow of institutional money appears to have become a self-reinforcing mechanism. Grayscales Bitcoin Trust alone has increased its bitcoin holdings by more than 66 percent  from 365,090 on June 9, 2020 to 607,270 bitcoin on December 28, 2020, per bybt.com. In an appearance on CNBC’s “Squawk Box,” Michael Sonnenshein, Grayscale’s managing director, said that it sees inflows that are six-times that of last year on its platform and that the type of investors has changed. Some of the largest investors are now investing with Grayscale and these investors are holding bitcoin for the medium- to long-term. 

While a domino effect for institutional investors can be observed, what is the underlining push for that? Why do these investors see the need to convert some of their capital to bitcoin? Saylor often talks about the need to convert a company’s cash reserves into bitcoin to protect its balance sheet against the dwindling value in fiat currencies, and particularly the U.S. dollar (USD) that has depreciated against other currencies over this year (as will be shown later in this article).

In a previous article, I have found that USD Google searches are strongly related to bitcoin searches and I have hypothesized that the impact of the dollar devaluation is more directly felt by people and that this leads to an increase in bitcoin purchase. 

The USD has lost value against other major currencies in general. This can be seen in the USD index (DXY), which includes a basket of the following six exchange rates: EURUSD, USDJPY, GBPUSD, USDCAD, USDSEK and USDCHF. 

One reason for that potentially is the unprecedented monetary expansion by the Federal Reserve Bank. However, not only the Fed expanded its balance sheet during this year — central banks like the European Central Bank (ECB) did as well, and other factors are at play too, which is why it makes sense to look at the DXY, which is affected by all of these factors. Changes in the world’s monetary landscape are an essential factor as well, as outlined in the excellent article “The Fraying of the US Global Currency Reserve System” by Lyn Alden. Due to this, it makes sense to look at the DXY development vis-á-vis the bitcoin price. 

Before looking at the USD index relationship with bitcoin’s price, let us first examine the Fed balance sheet and the bitcoin price. This relationship is shown in Figure 1.

Figure 1: Daily bitcoin price in USD (source: coingecko.com) (January 1, 2020 to April 24, 2020) and weekly Fed balance sheet (source: St. Louis FRED) (January 1, 2020 to December 23, 2020)

The bitcoin price and the size of the Fed balance sheet seem to be somewhat related. However, the price does not directly follow the balance sheet expansion during the first half of the year. 

This can also be seen in the correlation coefficients in Table 1. Over the whole period, both variables are correlated by 47.65 percent, whereas in the first half of the year it is only 6.20 percent and has strongly increased in the second half of the year to 86.41 percent. A very similar picture emerges for the money stock M1 and M2 over this year. 

While M1 has increased by over 65 percent, M2 increased by nearly 26 percent. The relationship of the monetary variables and bitcoin price seems to exist but does not appear to be as strong as for the DXY.

Table 1: Correlation coefficients of bitcoin price and selected variables

Over the whole year, the value of the DXY shows a strong negative relationship with the bitcoin price (see Table 1). It is much higher compared to the other two variables. This makes sense if we consider the fact that the U.S. dollar has not only lost value against other currencies due to monetary policy but also due to other mechanics at play. That is why the USD’s dwindling value against other currencies seems to be the more relevant variable. 

Looking at Figure 2, the DXY tracks the bitcoin price surprisingly well. This seems to mainly be true during the second half of the year after the DXY did break below 95 on July 22, 2020. This also seems to coincide with a rise in institutional interest in July and August. Interestingly, the DXY appears to be positively related with the bitcoin price during the first half of the year where the DXY has been predominantly ranging between 95 and 100. 

Looking at the correlation, however, it was already negative in the first half of the year (-0.4015). This only grew stronger in the second half, with a coefficient of -0.8253. While the dollar value had not been that important in the first half of the year, the breakdown in value seemed to have pushed investors over the edge and, with that, increased its relevance for the bitcoin price. 

Figure 2: Dollar index (Source: Investing.com) and bitcoin price in USD (source: coingecko.com) (January 1, 2020 to December 30, 2020)

While the above relationships are only correlations, the relationship nevertheless seems to be strong and, as a narrative, it seems to be an essential driver of institutional interest. Irrespective of what you think about which of these variables is effectively pushing institutions into bitcoin, monetary policy and the dwindling value of fiat currencies seems to be at the forefront of it. 

By the looks of it, the loose monetary conditions are here to stay and, as Alden explains in the aforementioned article, the trend of the declining value of the USD relative to other currencies will likely continue in the future. With USD’s bearish outlook against other currencies, the devaluation of currencies against hard assets, unprecedented monetary intervention that seems to be here to stay and the domino effect at play, expect more and more institutional investors to FOMO into bitcoin in 2021. All in all, this is bullish for bitcoin.

This is a guest post by Jan Wuestenfeld. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post How Monetary Policy And Dollar Devaluation Are Driving Institutional Interest In Bitcoin appeared first on Bitcoin Magazine.

Source: Bitcoin magazine