Search

Zerocap

  -  Articles   -  HODLers and the Bitcoin Supply

In March 2020, the Bitcoin (BTC) price took a dive, dropping almost 50% in just a few days. Since then, the cryptocurrency has seen a supply shock unlike any before it. A surge in demand by both retail and institutional investors was expected due to the price discount and increasing faith in the asset’s utility. However, the main driving factor was the increase in accumulation addresses paired with the BTC halving. The severe discount that was offered during March saw drastic uptake in BTC purchases. The subsequent rise in BTC price and greenback inflation risk introduced a flurry of institutional commitment to BTC. On the retail front, distrust in traditional markets and the decreased reliability of crypto exchanges is sparking increased interest in the benefits that OTC custody services and cold storage can offer for those with a long-term focus. This macro increase in HODLing is likely to trigger a mark-up phase whereby we could see the most significant BTC price surge since 2017.  

Causes for Decreased Supply

Bitcoin Halving

The most recent BTC halving event occurred on May 11th 2020, resulting in the Bitcoin mining reward reduction to 6.25 for every block mined. Occurring roughly every four years, this marks the third time the reward has halved.1 Since the halving, there has been a distinct increase in miner HODLing as the profit margin for the expensive mining operations has decreased. This is a bullish signal as it withholds thousands of BTC from entering the market daily, not only limiting supply even further but also providing a new price level for miners to distribute their BTC. Some price dips over the previous 6 months have directly coincided with miner sell-offs, suggesting that despite the halving event, miners still play a pivotal role in the future of Bitcoin’s value.

Increasing Value

Several factors have solidified Bitcoin’s place as a reliable store of value, particularly in such turbulent times. Alongside gold and other commodities, Bitcoin has seen a strong backing in 2020 as many are losing faith in traditional stores such as fiat. As central banks (in particular the Federal Reserve) continue to print money, inflation is becoming a major concern for those aware of the severe consequences it can bring. With no sign of slowing stimulus down, the global economy is falling further into recession. If this trend continues, it will likely devastate those reliant on traditional investment methods. With the March crash burned fresh into the minds of investors, many are choosing Bitcoin over longstanding value stores as a reliable asset to hedge the current risk in financial markets. Its controlled supply, increasing scarcity, high liquidity and security shape it as one of the most reliable assets today. As more and more investors continue down this path, the number of Bitcoin on the market will inevitably drop further as HODLers increase.

Distrust in Centralised Operations

Since the March black swan event, the amount of Bitcoin (BTC) held in exchange accounts has dropped by ~US$2.85 billion.2 This has been fueled by scandals in the crypto space this year due to increasing regulation. At the beginning of October, Bitmex was hit with an array of charges including violation of AML regulations and the Bank Secrecy Act.3 As such, a large portion of the exchange’s funds were seized, further pushing away investors and creating liquidity concerns. Since then, the exchange’s BTC futures have been priced lower than its competitors, creating arbitrage opportunities for investors. The action that should have been a normal market correction never occurred as solvency risk remains a major concern for investors.4 A similar situation has occurred with OKEx, a China-based crypto exchange. The founder has been arrested during an ongoing investigation of money laundering. As he is a private key holder on stored OKEx assets, the company has put a temporary hold on withdrawals.5 While this does not threaten the security of investor holdings, it does damage trust in centralised operations. A major factor of the cryptocurrency appeal is its fast liquidity and transportability, which has been completely nullified for OKEx customers. Holdings on crypto exchanges will likely continue to drop as investor sentiment dwindles. With this, the switch to cold storage and/or reputable custodians such as Gemini, Bitgo or Kraken could take place, further reducing the amount of BTC in the market. 

Institutional Influence

In recent months, institutions have committed significant funds towards BTC. With the likes of Square, Fidelity, Grayscale and Microstrategy committing billions between them to the future of the cryptocurrency, institutional influence is likely to affect the market consistently. With an estimated 4% of the supply held by publicly traded US companies, and no signs of institutional accumulation slowing down, cryptocurrency acceptance and accessibility will continue to develop.6 As discussed in Zerocap’s article ‘Institutional Investment Into Bitcoin’, the presence of such powerful players will be beneficial to the cryptocurrency and the financial frameworks that enable it to be integrated globally. One by-product of this increased attention from institutions will inevitably be decreased supply in circulation which will aid in BTC appreciation.

The Future of BTC

As both retail and institutional investors are increasingly committed to long-term holdings of BTC, the future of the cryptocurrency will be impacted in many ways. As the volume of long-term holdings increases alongside investor sentiment, the value will increase in a compounding manner. Faith and the development of key frameworks have played a large role in ensuring the crypto’s ongoing success. As institutional investment floods into the space, the continuation of these factors is likely to fuel a bullish forecast. Ultimately, the accumulation phase should drive price to recent heights, with the potential to feed into the biggest run seen to date. 

Bitcoin HODLers continue to validate the authenticity of BTC as a store of value and as an asset that can be completely decentralised. The continued adoption of BTC is fueling an exciting growth period for the crypto. Although the COVID-19 pandemic slashed prices initially, an increased understanding of the need for a reliable asset outside of traditional investment options has swept the globe. The timing of this increased adoption has created an environment that is incredibly bullish for BTC. The supply shock that the crypto is facing and will continue to face in the coming months will retest boundaries and allow us to reassess the true value of BTC and all that it can offer. 

References

  1. CoinTelegraph. (2020). Bitcoin Post-Halving Report (Q2 2020) by Cointelegraph Markets Research. Retrieved from CoinTelegraph: https://cointelegraph.com/news/bitcoin-post-halving-report-q2-2020-by-cointelegraph-markets-research
  2. Young, J. (2020). Seller shortage? Bitcoin exchange reserves plunge as BitMEX bleeds BTC. Retrieved from CoinTelegraph: https://cointelegraph.com/news/seller-shortage-bitcoin-exchange-reserves-plunge-as-bitmex-bleeds-btc 
  3. Wright, T. (2020). BitMEX charges send ‘a message’ to global exchanges: Crypto Mom. Retrieved from CoinTelegraph: https://cointelegraph.com/news/bitmex-charges-send-a-message-to-global-exchanges-crypto-mom
  4. Pechman, M. (2020). Lagging Bitcoin futures premium shows BitMEX is losing investor trust. Retrieved from CoinTelegraph: https://cointelegraph.com/news/lagging-bitcoin-futures-premium-shows-bitmex-is-losing-investor-trust
  5. Jia, D., & Yue, H. (2020). China’s OKEx halts cryptocurrency withdrawals after founder arrested. Retrieved from Nikkei Asia: https://asia.nikkei.com/Spotlight/Caixin/China-s-OKEx-halts-cryptocurrency-withdrawals-after-founder-arrested 
  6. NVK. (2020). Bitcoin Treasuries in Publicly Traded Companies. Retrieved from Bitcoin Treasuries: https://bitcointreasuries.org/