PrimeXBT Lead Analyst Kim Chua: The Cause of BTC Supply Crisis and Why It Will Get Worse

The year 2020 saw a major shift in the composition of BTC buyers, with institutions and large corporates with plenty of money to deploy the main buyers of BTC. This phenomenon became even more widespread after Grayscale Bitcoin Trust started acquiring Bitcoin more aggressively in the early part of last year, as well as the well-telegraphed purchases made by MicroStrategy.

On August 11th last year, MicroStrategy completed its initial purchase of 21,454 BTC at a total aggregate purchase price of $250 million, implying an average price of $11,653. This purchase was followed by a buy of 16,796 BTC for $175 million (average price $10,419) in September 2020. Next, on the 5th of December, the company said it had just made its third Bitcoin purchase of 2,574 BTC for $50 million in cash (average price $19,427).  These purchases were much publicized and caused other corporates to follow in MicroStrategy’s footsteps. MicroStrategy also successfully conducted a bond sale in early December which was highly popular and raised $650 million instead of its original $550 million and used the funds to purchase 29,646 BTC. This brought the company’s total holdings to 70,470 BTC, ie MicroStrategy alone amassed 70,470 BTC from August to December.

Other than MicroStrategy, the other major buyer of Bitcoin is the Grayscale Bitcoin Trust. While MicroStrategy may stop buying BTC after it thinks it has bought enough, Grayscale Bitcoin Trust is a consistent buyer who has been buying regularly, with an unceasing demand thus far to the point it has have to halt onboarding new customers temporarily.

From June last year, Grayscale has increased its Bitcoin holdings by 70%, buying up around 250,000 BTC, with a clear uptick In December where the pace of purchase picked up significantly. The company added a total of 72,950 BTC ($2.132 billion) to its assets under management (AUM) in December alone, underscoring the great demand for Bitcoin from its accredited investors and family office clientele.

With such huge purchases from institutions with no intention of selling their BTC stash for a long time, the supply of new BTC mined lacks far behind in meeting demand. Miners are only able to generate around 28,112 BTC per month no matter how much demand is.

MicroStrategy, having bought 70,470 units, together with Grayscale’s 250,000 units, have in total bought up a whole year’s newly mined Bitcoin, with Grayscale buying up 3x the mined supply of Bitcoin in December alone by buying 72,950 units.  This shows the demand-supply imbalance of Bitcoin which will cause the price to go higher as buyers will need to bid up the price to entice other holders of BTC to sell.

This year, more BTC-focused funds will be set up. SkyBridge Capital has launched a Bitcoin fund and has opened for subscription on Jan 4th. Even before the fund opens for subscription, SkyBridge has already invested $182 million into BTC. Another institution, Van-Eck, has also re-applied for a Bitcoin ETF and has proposed that they will hold actual Bitcoin in custody like Grayscale. With prominent institutions like these getting into the game, demand for BTC is expected to soar this year, exacerbating the supply crisis.

According to data, there are only 4.2 million units of Bitcoin constantly circulating in the system for buying and selling, the other 14.5 million units are held for the long term and have not changed hands for a long period, implying that these BTC are illiquid. Over the course of 2020, a total of 1 million additional Bitcoin have become illiquid, implying that buyers are holding onto their Bitcoin, refraining from selling.  If such long-time holders continue to hold and not sell their BTC, the dominant cryptocurrency would become scarcer and more difficult to accumulate, and buyers will need to bid at higher and higher prices to be able to purchase their much-wanted BTC. With less Bitcoin available for sale, but demand increasing at a rapid pace, the supply crisis is hence expected to worsen this year and will drive the price of BTC to go a lot higher, possibly even going parabolic. 

About Kim Chua,  PrimeXBT Market Analyst:

Kim Chua is an institutional trading specialist with a track record of success that extends across leading banks including Deutsche Bank, China Merchants Bank, and more. Chua later launched a hedge fund that consistently achieved triple-digit returns for seven years. Chua is also an educator at heart who developed her own proprietary trading curriculum to pass her knowledge down to a new generation of analysts. Kim Chua actively follows both traditional and cryptocurrency markets closely and is eager to find future investment and trading opportunities as the two vastly different asset classes begin to converge.

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