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To investors,
It is usually very difficult to predict why and when bitcoin’s price may move up or down. With the benefit of hindsight, this analysis becomes much easier. A great example is the bitcoin move from $10,000 to $64,000 during September 2020 into March 2021.
We were in the heart of the pandemic and the central bank was engaged in historic levels of monetary stimulus. In May of 2020, we also had experienced the bitcoin halving, which brought the daily incoming supply to 900 bitcoin. This set the stage for what would become one of the most epic run ups in bitcoin price.
The bitcoin halving created a supply shock, but a lesser known fact is that we saw a demand shock in Q3 and Q4 of 2020. First, Michael Saylor and MicroStrategy started to buy billions of dollars of bitcoin. At the same time, hedge funds and family offices were piling billions of dollars into the GBTC arbitrage trade.
This was noteworthy because MicroStrategy was exclusively a buyer in the market - they have no intentions of ever selling their bitcoin. GBTC is similar in that they have no redemption functionality, which means that they can only buy and there is no ability for the ~ 3% of circulating supply held within their fund to be returned to the market.
While these demand shocks were playing out, bitcoin holders were making the bitcoin supply highly illiquid. Nearly 65% of the circulating supply of bitcoin, as of September 2020, hadn’t moved in over a year. Supply shock plus demand shock means that the bitcoin price had to go up to accommodate everyone. This is exactly why bitcoin rose from ~ $10,000 to $64,000 from September 2020 to March 2021.
So what exactly does that have to do with the current bitcoin market?
Well, it appears we are watching the same situation play out again. Bitcoin’s illiquid supply is actually the highest it has ever been.
The amount of bitcoin sitting on crypto exchanges, which could be sold into the market at a moment’s notice, is sitting at a multi-year low.
As these market is becoming more illiquid, there is a significant increase in demand happening at the same time. Most notably, the Terra ecosystem is purchasing billions of dollars of bitcoin to put in the reserves of their UST stablecoin.
When you have an illiquid market meeting a persistent bid of approximately $125 million in daily demand, the price has to move upwards to accommodate everyone. To put this in perspective, Terra is purchasing approximately 300% of the daily incoming supply of bitcoin issuance.
The bitcoin miners are currently being paid about $43 million a day to secure the network via the block reward. Terra is purchasing $125 million a day or so. Quite literally, there just isn’t enough bitcoin available to satisfy demand and therefore the price is rising at a steady pace.
History is not a perfect guide for the future, but the bull run of 2020-2021 is indicative of what can happen when the demand shock overwhelms the available amount of bitcoin. If you’re not paying attention to market dynamics, now would be a good time to start watching closely.
Hope everyone has a great start to your day. Talk to you tomorrow.
-Pomp
If you are not a subscriber of The Pomp Letter, join 215,000 other investors who read my personal opinion on finance, technology, and bitcoin each morning.
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Here Is Exactly Why Bitcoin Price is Going Up
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There Is Not Enough Bitcoin Available In The Market