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Don't know what a Supply Squeeze

In this article I will explain what it is and why it is likely to happen right during or at the beginning of the next bull-market.

We will analyze Glassnode46th Week Report together and understand the reasoning behind this theory, thus drawing a conclusion on what the most probable scenario is for the near future of BTC.

What are we talking about

In the context of chart analysis in the crypto world, the Supply-Squeeze scenarioSupply-Shock) is an unexpected movement in the price of an asset that occurs in a very short time and is caused by a low availability of the same at the level of the exchanges. In practice, when the supply of an asset drops to the point that demand is no longer satisfied by supply (and provided that the former is much higher than the latter), the price undergoes a sudden increase. There are many reasons why, according to Glassnode, this term applies to Bitcoin. First of all, in fact, it is a scarce asset as its availability is limited to a maximum of 21 million circulating coins, of which approximately 91% have been mined to date. Secondly, Bitcoin is seen by many as an asset to invest in for the long term and this is why it is stored for very long periods on-chain and not on exchanges. Finally, it is estimated that approximately 8% of the working capital has been lost forever due to errors of various kinds, which would further reduce the maximum achievable supply and make the asset even more scarce.

4th Halving

Let's now get to the heart of the analysis of the report published by Glassnode and start by defining why Bitcoin is heading towards a significant reduction in its supply. The event that reduces mining rewards by 50% is called Halving and is one of the most important for Bitcoin as a protocol. It occurs once every 210,000 blocks, i.e. approximately every 4 years. According to estimates, the next one is scheduled for April 23, 2024, but it is still too early to be sure.

Today, a miner who mines a block on the Bitcoin blockchain receives 6.25BTC as a reward. The issuance of new Bitcoins for now is therefore equal to 1 million dollars per month, but just after the halving the block reward will drop to 3,125BTC and the issuance will be 0.5 million per month. It was the same for past halvings too and, as can be seen, the circulating supply curve is bending as if it had a horizontal asymptote in the graph. This asymptote is not a random value but is represented by the famous 21 million, i.e. the maximum number of coins that can be mined.

Historically there has always been a positive correlation between the halving event and the price of Bitcoin. In fact, it tends to increase exponentially following the greater scarcity and also the media relevance it assumes. New investors are promptly attracted and the fear of missing out on a certain profit (FOMO) causes demand to present itself forcefully. All past halvings therefore showed very high market performance in the 365 days that followed the event, leading to mind-boggling percentage increases.

Investor behavior

However, what drives demand in a market is both the behavior of those who invest and those who trade. On Bitcoin it is not difficult to do both even if historically the profits of those who invested in the long term have been greater. As can be seen from the following graph, it is possible to clearly distinguish between those who hold BTC for a short period (and usually use it for active trading) and those who hold it for a long time.

Less than 10% of the circulating capital is in the hands of small or medium-term investors and the percentage has been decreasing since 2021. This could be a first sign of maturation of the market and the investor: it is in fact learning to accumulate. This is confirmed by the March 2020 inflection point in Bitcoin's liquid supply curve, after which it started to decline. The liquid supply is that part of circulating coins that are in frequent movement and, when it starts to decline, then the illiquid one grows accordingly. This data shows us unequivocally that coins are moving from wallets with a high number of transactions to more static wallets and the flow has been ongoing for several years. With the latest market cycle, therefore, the average investor has begun to accumulate and set aside more and more assets, a behavior probably also partly due to the awareness following the world events from January 2020 onwards.

Wanting to go into more detail, however, we must remember that the accumulator is not only the small investor but also the large investment funds, public and private companies. Grayscale, Microstrategy and MTGOX, to name a few, are among the main whales holding very large quantities of coins. In fact, with the approval of the spot ETF upon us, they need to accumulate BTC as an underlying for the financial products they want to sell.

Exchanges (CEx)

Let's now analyze the BTC reserves stored in the main CExs and understand the ongoing dynamics.

Also from this graph the turning point of March 2020 is unequivocally visible. The reserves of the main exchanges which were previously growing have suffered a halt in their trend and a consequent reversal. Coinbase, for example, has reduced its reserve by almost 50%. Finally, Glassnode, in its report, cross-references the supply defined as liquid in the hands of entities (short-term holders) and exchange reserves, obtaining very interesting data. These two figures together represent 23% of the entire Bitcoin supply. By carefully observing the latest market cycle, we note how there was a significant sell-out at the height of the last bull-run, which then triggered the bear market, but we also note the multi-year decrease in circulating supply. This is perhaps the most explanatory graph of the trend of circulating coins and from where the greatest amount of information can be deduced. STH and exchanges in fact represent two sides of the same coin: a trader who holds BTC in his wallet will only move it to sell it and will then deposit it at a CEx. Photographing the supply in the hands of these two entities therefore means having data that speaks of coins not used for the purpose of the investment.

Supply analysis

Finally, let's analyze Bitcoin's currency. Its supply, in fact, is currently divided between short, medium and long-term holders. The data that immediately catches the eye, however, is the almost insignificant difference between the circulating supply and the "Vaulted Supply" curve, which refers to coins lost or kept for very long periods. The other curves, however, demonstrate a growing trend in the last year and this is also a further sign of absolute accumulation. It is surprising to note how medium-sized entities are making their way, accumulating modest quantities of bitcoin. They are represented by wallets of medium capacity and are clearly increasing.

By combining the more static supplies such as long-term holders (LTH), vaulted-supplyilliquid-supply and comparing the result with the data deriving from STH+CEx balances a huge divergence appears. These are obviously two opposite trends that generate a significant value on the graph of the last 4 years. The migration of coins is therefore happening unabated and can be seen with the post-2021 increase in LTHs.

To conclude the analysis of coins in circulation, let's take a look at the speed of accumulation in relation to the issuance of new BTC. This is another beautiful graph that combines two very explanatory values. As we know, today around 81,000 BTC are mined every quarter and after the next halving around 40.5k/quarter will be mined. The speed of accumulation of investors, however, is equal to 180k BTC per four months, i.e. more than double the issue. Overall, moreover, we note how accumulation in the history of Bitcoin has been a trend that has accompanied it since the beginning. Since February 2022, demand has become stronger, unsustainably exceeding supply which, however, is always the same.

Glassnode report is one of the most beautiful and complex I have read recently. It is in fact a complete analysis that evaluates Bitcoin from many aspects and from different points of view. The evaluation made on its scarcity and then compared with the speed of accumulation of investors highlights the fact that Bitcoin is not just a payment system but represents much more. It has now become a reserve of value, an asset whose issuance is controlled and finite. Investors seem to have understood that, unlike money which can be printed according to the need of the moment, Bitcoin has a maximum limit of circulating coins. This causes its value to appreciate over time, attracting more and more investors who want to protect their capital from the erosion of inflation. Institutional investors also seem to have noticed this asset ownership and are trying to accumulate as much as possible. From the small "" to the large "", if the accumulation trend continues at this rate, everyone will have to deal with the fact that there are not enough new coins. Here we connect with the title of this article: in the opinion of the writer, in fact, given the data it is impossible not to believe that a Supply Squeeze is not around the corner. I'm not referring to the next few weeks, but as soon as the post-halving media interest starts again, the issuance of new BTC will not be sustainable and the CEx reserves cannot cope with the demand. In all this, the impact on the market of a probable spot ETF was not considered. It is true that the institutional investor has most likely already purchased the necessary underlying asset in unsuspecting times, but will it be enough?

We leave the arduous task of answering to the reader, meanwhile we remain aware that those who had the humility to inform themselves and understand the protocol first will be the ones who will be most rewarded in the future.

Disclaimer: This article does not provide any investment advice. All data is provided for information and educational purposes only.

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