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Bitcoin Faces Historic Liquidity Crisis Amid Surging Demand

Bitcoin is encountering a significant liquidity challenge amid an unprecedented surge in demand for the digital currency.

Analysts at CryptoQuant report a remarkable escalation in monthly demand, surging from 40,000 BTC at the beginning of the year to a staggering 213,000 BTC currently. This surge is largely credited to the expanding total balance of accumulation addresses, signaling a heightened level of investor interest in acquiring Bitcoin.

Bitcoin Liquidity Crisis Strikes Crypto Market

Bitcoin exchange-traded funds (ETFs) in the US are significantly driving the surge in demand for BTC. Excluding GBTC, these ETFs have witnessed a remarkable increase in their BTC balances. Between February 25 and March 17, their balances surged from 117,000 to 185,000 BTC.

This trend underscores the pivotal role of institutional investments via spot ETFs in fueling the demand for Bitcoin.

Furthermore, there is a notable uptick in the appetite for Bitcoin among large holders, or “whales.” The year-on-year growth in the total balance of Bitcoin whales — individuals holding between 1,000 to 10,000 BTC — has hit an all-time high of 1.57 million BTC. This marks a significant acceleration from 874,000 BTC at the beginning of 2024.

Bitcoin Whale Holdings. Source: CryptoQuant

Simultaneously, the sell-side liquidity of Bitcoin is on a downward trajectory. The total visible amount of Bitcoin held by key entities has contracted to 2.7 million BTC, a notable decline from the peak of 3.5 million BTC recorded in March 2020.

This disparity between record-high demand and diminishing sell-side liquidity has resulted in a historic low in Bitcoin’s liquid inventory. Current estimates suggest that the existing sell-side liquidity can only meet the soaring demand for the next twelve months, considering demand solely from accumulating addresses.

The situation becomes even more concerning when factoring in the exclusion of Bitcoin on exchanges outside the US, with the liquid inventory plummeting to a mere six months of demand. This exclusion is predicated on the assumption that US spot Bitcoin ETFs primarily procure Bitcoin domestically.

“Record Bitcoin demand paired with declining sell-side liquidity has resulted in the liquid inventory of Bitcoin plunging to the lowest ever in terms of months of demand… A declining liquid inventory would support higher prices,” analysts at CryptoQuant wrote.

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