Institutions Could Be Causing A Bitcoin Liquidity Shortage


The Bitcoin market is maturing. Pretty much everyone who has been watching the market for the past year understands that Bitcoin has completed its metamorphosis and is no longer a fad that some people chase. It is a bonafide investment product and deserves to be treated as such.

Last year, Bitcoin achieved a feat that many believed was impossible. It managed to deliver even better returns than what we saw in 2019, going from a little over $7,000 at the beginning of the year to $29,000 when it was all said and done (according to data from CoinMarketCap). This increase meant a big payday for investors, who were more than happy to cash in and smile to the bank.

Running from the Coronavirus

It is worth understanding what led to this surge. The coronavirus ravaged the global economy, causing countries to cut trade and companies to shut their doors. With economies stalling, currencies took a significant beating. The dollar stalled, and several other currencies got marked down significantly.

Naturally, it would only make sense for everyone to look for ways to hedge their losses and move into safe-haven assets. So, the question was - which asset would work.

Oil was a bust. In April, the West Texas Intermediate (WTI) index fell into negative territory for the first time. Apparently, the fact that countries had shut their doors led to a reduced demand for oil. People were indoors more, so there wasn’t much need for gas. Flights were grounded as well, so demand for jet fuel hit the ground. All of these made it incredibly challenging for the oil industry.

Gold was doing fine, but its rise wasn’t as swift for investors. For a long time, many have seen gold as being too primitive or appealing. The coronavirus wasn’t so different after all. Also, because of companies closing their doors, many people become unemployed. So, these people started to search for options to earn online while sitting at home. Fortunately, there's another option: crypto.

Bitcoin Provides a Perfect Haven

So, there became Bitcoin - the new kid on the block that provides incredible excitement around the investment world. Soon enough, the big hitters came in. The first was MicroStrategy, a business intelligence company based out of Virginia. The company announced in August that it had moved to the Bitcoin standard and would be converting most of its reserves into the asset.

Over the next few months, MicroStrategy bought more Bitcoin. The company even issued convertible senior notes in December, raising $650 million from the sale. As it explained, most of the funds would be used to purchase Bitcoin.

Several other companies cashed in on Bitcoin too. Square, the payment processor run by Twitter CEO Jack Dorsey, moved 1% of its reserves into Bitcoin in September - marking a purchase worth $50 million. Ruffer Investments, a British asset management firm, also bought about $750 million worth of the leading cryptocurrency in December.

At the same time, several leading crypto firms were scooping up Bitcoin. Grayscale Investments, the industry’s largest asset management firm, has been moving up the ladder and now has over $20 billion in assets under management. 

This week, Rafael Schultze-Kraft, the CTO of crypto analytics firm Glassnode, noted that Grayscale is buying up more Bitcoin than is being mined. As he said in a tweet, about 26,000 BTC was mined in January 2021. However, Grayscale has already purchased 40,000 BTC this year.

The Liquidity Crunch


In truth, the entrance of institutions into the Bitcoin market has been a blessing. If not for anything, the fact that big companies have made Bitcoin plays has put the industry on the radar. Now, big Wall Street players are weighing up the opportunities in the Bitcoin market and the possibility of making plays.

Some even believe that Bitcoin is very much on its way to crush gold as the global reserve asset. 

However, this influx of institutions is also causing problems for the liquidity of Bitcoin. Most institutions who come into the Bitcoin market tend to be holders who keep their assets and wait for it to rise in value. By buying more of the asset, they are essentially leaving less for traders.

These traders themselves have been making their voices known. In February, eToro, a crypto-friendly trading app, noted that customers had been demanding more of Bitcoin, and it could move into more drastic measures to handle the situation. In addition to traders, ordinary people who want to buy some BTC at the first time, face almost 10% slippage in price and volume limits. For example, due to the Tokpie exchange data, a person who wanted to quickly buy Bitcoin with a bank card had to pay $56,140 per 1 BTC when its price was $51,090 on spot markets. Moreover, the limit was 0.3 BTC for such bank card purchases.

The entire problem started last year. In December, Glassnode reported that Bitcoin was becoming more difficult to buy as institutions had accumulated more of it. As the report showed, $27.8 billion worth of Bitcoin had become illiquid in 2020. With institutional, long-term investors accumulating more of the asset, only about 4.2 million BTC tokens were available in circulation for dry traders and regular transactions.

“Bitcoin liquidity is defined as the average ratio of received and spent BTC across entities. We show that currently 14.5M BTC are classified as illiquid, leaving only 4.2M BTC in constant circulation that are available for buying and selling,” Glassnode said.

Now that traders are demanding more, miners have also had to ramp up their operations. Sadly, these miners themselves have been struggling to keep up with demand. Last month, Reuters reported that mining rig manufacturers were dealing with inventory shortages. Per the report, Bitmain, the industry leader, had run out of inventory and won’t have any available until at least August.

Bitmain’s rigs are now selling at a premium. As Reuters noted, the company’s flagship product - the Antmminer s19 - sold for $1,897 as of November 2020. Now, the rig sells for $4,767. Everywhere you look, the effects of institutional demand are being seen.

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