Photo by Matt Cardy
As we approach the fourth bitcoin halving, expected around April 23, 2024, a significant tightening in bitcoin's supply is developing, reaching unprecedented levels. The current scarcity of bitcoin's available trading supply and investor accumulation patterns are key factors to watch as this critical event draws closer.
A pronounced constriction in supply is being observed, a trend not seen before. The analysis focuses on 'available supply' and the increase in 'supply storage' by long-term investors. Utilizing the market cap to realized cap relationship, this supply tightness has a magnified impact on bitcoin's valuation due to increased capital inflows.
The Bitcoin
Investors closely watch halvings due to their historical association with market upswings. This phenomenon is explored through supply and investor behavior patterns from an on-chain perspective. Glassnode analysis estimates the 'active and available' bitcoin supply, focusing on the amount likely to be traded shortly.
Bitcoin: Actively Traded Supply
Metrics such as Short-Term Holder Supply, which indicates coins most likely to be spent, and measures of more actively traded supply, including Futures Open Interest, are considered. These metrics reveal that only 5-10% of the circulating supply is actively traded.
Bitcoin: Short-Term Holder Supply and Exchange Balances
Another perspective is the classification of wallets into Illiquid, Liquid, and Highly Liquid categories. A trend worth paying attention to is the shift of coins from exchanges to Illiquid wallets since March 2020.
Bitcoin: Liquid and Illiquid Supply
There's a clear trend of declining 'available supply' and a marked increase in 'stored supply.' This includes Long-Term Holder Supply, Illiquid Supply, and Vaulted Supply. The rate of stored supply currently surpasses new bitcoin issuance, with Illiquid Supply increasing at a rate 2.2 times higher than new issuance.
Capital flows are assessed using realized cap as a proxy, a method detailed by Glassnode. This approach reveals that in bear markets, smaller capital inflows or outflows can lead to significant market impacts, a consequence of the current supply dynamics.
The fourth halving is more than just a technical event; it's a fundamental shift that intrigues investors, given the historical return profile in prior cycles. The convergence of various metrics indicates that 'available supply' is at an all-time low, while 'supply storage' rates are significantly higher than issuance rates. This unique scenario sets the stage for the halving event, with potential implications for bitcoin's value.
Bitcoin's upcoming halving event aligns with a distinct shift in global financial strategies. As bitcoin enters its own quantitative tightening phase, reducing the daily supply of new coins, it contrasts with the current fiat market's attempts to control inflation through quantitative tightening.
This simultaneous occurrence could lead to an ironic twist: while bitcoin tightens its supply, real-world economies might have to consider expanding their money supply to manage economic stability. Such a collision of monetary policies could create a unique scenario for bitcoin's valuation. If fiat currencies expand their supply as bitcoin constricts its own, we could witness an unusual divergence in economic dynamics, potentially catapulting bitcoin's price to unprecedented levels as these contrasting strategies play out.
Impact on Bitcoin Price
The tightening supply, combined with increasing storage rates, suggests a bullish scenario for bitcoin prices. As supply becomes scarcer and investor interest in holding bitcoin increases, especially with the approval of a spot bitcoin ETF imminent. The result is likely to be a strong upward pressure on bitcoin's price. This trend, particularly in the context of the halving, has historically led to increased valuation, potentially setting the stage for a new market cycle with new all-time highs.
