Examining the Bitcoin supply shortage issue from blockchain data and indicators

Exploring the Bitcoin Supply Shortage Problem Insights from Blockchain Data and Key Indicators

Author: Glassnode, UkuriaOC; Translation: Dalin Think Tank

In the market, the supply of Bitcoin has always been tight. Recently, the number of Bitcoins held by long-term investors has reached a historic high, and the amount of Bitcoins held continues to increase rapidly. In this article, we will use some on-chain data and indicators to explore the issue of Bitcoin supply tightening.

Summary

• The current Bitcoin supply is very tight, with indicators for observing non-liquidity, held, and long-term holder Bitcoin supply all at historic highs.

• The behavior of short-term holders spending Bitcoin indicates that the market dynamics have shifted as the market has rebounded to over $30,000.

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It is expected that the next Bitcoin halving will occur in 166 days, and the possibility of a spot ETF listing in the United States is also increasing. Therefore, investors’ excitement is reaching new heights. In this scenario, one question investors will face is how much Bitcoin is freely circulating in the market as opposed to being tightly held in investors’ wallets.

In this article, we will explore this question by looking at the distribution of Bitcoin from a macro perspective and measure the degree of Bitcoin supply tightening through various on-chain data and indicators.

Bitcoin Getting “Older and Older”

The performance of digital assets this year has been impressive. Nevertheless, long-term Bitcoin investors continue to firmly hold their digital assets. Among the existing Bitcoins, the proportion of those held for over one year is hovering at several historic highs:

• Last active period was one year ago: 68.8%

• Last active period was two years ago: 57.1%

• Last active period was three years ago: 41.1%

• Last active period was five years ago: 29.6%

Figure 1: Percentage of Bitcoins in circulation held for the last active period one year ago

The non-liquidity supply indicator measures the supply in wallets with the least spending history, reaching an all-time high of 14.5 million Bitcoins. The change in Bitcoin’s non-liquidity supply usually synchronizes with withdrawals from wallets through trading platforms, indicating that even though investors withdraw these Bitcoins, they are still being held in custody. Since May 2021, the total amount withdrawn in transactions has exceeded 1.7 million Bitcoins.

Figure 2: Bitcoin’s illiquid supply

The tightening trend of Bitcoin’s supply is also reflected in the monthly change rate of illiquid supply. Currently, illiquid supply is still in a net growth phase that has lasted for years and continues to grow at a rate of over 71,000 BTC per month.

Figure 3: Changes in Bitcoin’s illiquid supply

We see a similar pattern of change in the net position of long-term Bitcoin investors (also known as the “arch supply indicator” in the Cointime Economics framework). Since June 2021, the trend of this indicator reflects continued influx of funds, which has seen a significant increase after the collapses and panic sell-offs of 3AC and LUNA-UST in June 2022.

This change in the indicator indicates the maturing of the Bitcoin supply market, as investors are cautious in holding their digital assets and avoid irrational behavior of fast trading due to impulses.

Figure 4: Changes in the net position of long-term Bitcoin investors

Investor Sentiment Divergence

The supply of long-term Bitcoin investors (represented by the blue line in the chart below) is currently slightly below historical highs, while the supply of short-term holders (represented by the red line in the chart below) is at historical lows, showing a clear divergence. This dynamic clearly indicates that due to holders’ increasing tendency to hold rather than use their Bitcoin for investments, the Bitcoin supply in the market is becoming tighter.

Based on our previous research, long-term Bitcoin investors have historically waited for the price to surpass historical highs before reallocating their Bitcoin holdings. This investment tendency was proven during the significant tightening of Bitcoin supply in the bull market of 2021, accompanied by increased supply from short-term investors and inflow of digital assets to trading platforms.

Figure 5: Clear turning point in the supply of long-term/short-term Bitcoin investors with price

If we calculate the ratio of long-term investors to short-term investors, we can see that it has reached a new high since July 2023. This clearly shows the significant difference between dormant supply and liquid supply, highlighting the current tightness in the Bitcoin supply market.

Figure 6: Ratio of long-term/short-term Bitcoin supply

The Activity to Volume Ratio (A2VR) is a new indicator that elegantly describes this difference on a macro level. It measures the historical balance of “activity” and “inactivity” of digital assets by comparing the holding time of Bitcoin investors.

• An upward trend in this indicator indicates that these long-term held assets are being spent, with a larger upward movement representing more active asset allocation.

• A downward trend in this indicator indicates that Bitcoin investors are more inclined to keep their assets in a passive state rather than being “active,” and the steep curve indicates that this trend will continue to accelerate.

Since June 2021, the A2VR indicator has been in a downward trend, with the gradient becoming noticeably steeper after June 2022. The indicator has now reached a low point similar to early 2019 and late 2020, both of which happened before significant upward trends in the market. This also indicates that the “prosperity” of the 2021-22 cycle has been completely swept away by the market.

Figure 7: Trend of Bitcoin’s A2VR indicator

Another perspective to evaluate investor activity is to analyze their spending behavior. The seller risk ratio is a good indicator that assesses the absolute value of investors’ locked-in profits or losses relative to the asset size (measured by realized upper limits). We consider this indicator in the following framework:

• When this indicator is at a high value, it represents investors’ willingness to spend their digital assets with a higher risk and higher return investment strategy compared to their cost basis.

• When this indicator is at a low value, the majority of spending assets are in a state of approximate balance between income and expenses, indicating that the “price gains and losses” of digital assets within the current range have been exhausted.

In this case, we only consider the short-term investor group as they are one of the main drivers of daily price trends. After the recent price surge to $35,000, the seller risk ratio skyrocketed from historical lows, indicating a “reawakening” of many “new Bitcoins” (referring to Bitcoins held for a short period of time). This suggests that this group has seen significant profits recently.

Figure 8: Seller risk ratio of short-term investors

However, for the long-term holder group, although their seller risk ratio has slightly increased, it still remains at a very low level compared to historical background. The current situation is similar to 2016 and the end of 2020, when the overall Bitcoin supply also experienced a similar tight situation.

Figure 9: Proportion of selling risk for long-term investors

Cumulative Bitcoin Holdings

A previous set of indicators mainly evaluated the current tight supply situation in the Bitcoin market from the perspectives of Bitcoin holding and market maturity. Next, we will discuss the Bitcoin supply from the perspective of wallet transactions. The cumulative trend scoring indicator helps track the Bitcoin supply in the current market based on the scale of holder wallets. This indicator has shown unusual dynamics since late October.

In the graph below, we can see that wallet accounts of various investor groups have very good inflow behavior scores, which is obviously the best evidence of the tightening Bitcoin supply in the market from the beginning of the year. From this fact, we can observe the following pattern: during periods of increased net outflow of Bitcoin in most investor wallets (red squares in the graph below), the market encountered resistance; while market uptrend coincided with the changing trend of balanced inflow (blue squares in the graph below). This phenomenon demonstrates the strengthening of investor confidence and changes in trader behavior.

Figure 10: Cumulative trend scoring of Bitcoin holdings

If we focus on holders with smaller scales, such as “shrimp” (<1 BTC), "crab" (1-10 BTC), and "fish" (10-100 BTC), we will find that the importance of these holders in our research observations is becoming more prominent. The growth rate of this sub-group's balance is currently equivalent to 92% of the newly mined supply and has remained high since May 2022.

Figure 11: Balance changes from “shrimp” to “fish” compared to Bitcoin mining volume

Research on Cost Basis Intensive Areas

Simply put, we can currently identify cost basis-intensive areas and “gap areas” formed by relatively low transaction volume through Unspent Transaction Output (UXTO) and realized profit distribution (URPD). We can see the current four key areas that are very close to our current spot price.

• Part A: In the second and third quarters of 2023, there is a large amount of Bitcoin piled up in the price range of $26,000 to $31,000 on the market.

• Part B: There is a gap between $31,000 and $33,000, indicating that the price quickly surpassed that range.

• Part C: Recently, a large number of Bitcoin transactions occurred in the price range of $33,000 to $35,000.

• Part D: During the 2021-22 cycle, the cost basis of approximately 600,000 Bitcoins was slightly higher than the price range of $35,000 to $40,000.

Figure 12: URPD after physical adjustment

Finally, we can further explain this issue by separately analyzing the URPD of long-term investors (blue) and short-term investors (red). We noticed that most of the short-term digital assets sold at a profit, and the majority of these assets had a basic cost in the range of $25,000 to $30,000. Since short-term investors adopted a “take profit” strategy in the previous price increase, the seller’s risk ratio has also increased – these transactions transferred digital assets at the current price to new investors.

Overall, this indicates that the $30,000 to $31,000 range should be a key area of focus, as it offers the largest market supply of Bitcoin and is also positioned in the upper area of the cost-intensive region. Given that there are still relatively few Bitcoins being traded around $35,000, it suggests that the market will only react significantly when the price returns to $30,000. The estimated Bitcoin price in the market should align with the true market average price mentioned in our previous report, which is also the best estimate of the “active investor’s cost basis.”

Figure 13: Unspent Realized Profit Distribution (URPD) after physical adjustment

Summary

The market supply of Bitcoin has always been tight, especially recently – many indicators describing “Bitcoin inactivity” have reached multi-year or even historical highs. These data demonstrate the severity of the Bitcoin market supply shortage, which is particularly concerning considering Bitcoin’s strong performance from the beginning of the year. With Bitcoin expected to halve again in April next year and the positive momentum of current US spot ETFs, the next few months are expected to be exciting for Bitcoin investors.

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