Chainalysis shortage bitcoin skyrocketing price

Chainalysis: A worsening shortage is behind bitcoin’s skyrocketing price

Big and smart money investors are buying up and holding onto BTC far faster than miners can produce it as the first cryptocurrency comes into its own as an inflation hedge

Bitcoin is getting more expensive because fewer people are selling it.

That is the basic finding in blockchain intelligence firm Chainalysis’ Nov. 19 Insights blog

The amount of liquid bitcoin—that held by wallets that trade as oppose to hold—”is similar to what it was during the 2017 bull run,” the blog said. “But the amount held in illiquid wallets is much higher, currently representing 77% of the 14.8 million bitcoin mined that isn’t categorized as lost… That leaves a pool of just 3.4 million bitcoin readily available to buyers as demand increases.”

And those 3.4 million BTC are being traded more often. Chainalysis found that trade intensity—how many times a bitcoin is traded on an exchange before someone moves it off into cold storage or another exchange—has jumped nearly 40% above the 180-day average.

Not the hodlers

But the real difference is who’s buying those bitcoins, and why.

“In 2017, most demand came from individual, retail investors buying with their own personal funds, many of whom had varying degrees of experience with and knowledge of cryptocurrency,” Chainalysis said.  

But this year, a great deal of the demand is coming from institutional buyers like MicroStrategy, hedge fund manager Paul Tudor Jones, and Twitter CEO Jack Dorsey’s Square payments firm, which are pouring tens if not hundreds of millions of dollars into bitcoin. 

That means the who, Chainalysis said, is “mainstream investors and financial institutions.”

Reports say that they are buying far more bitcoin than miners can replace.

The why is simple enough: the “money printer go ‘brrrr’” tweets that were popular a few months ago. Staggering economic uncertainty has been staved off by central banks around the world printing and spending not billions but trillions of dollars to ward off an economic collapse due to the coronavirus pandemic.

“Back in March and April, it became really apparent, given the monetary policy that was being pursued by the Fed, the incredible quantitative easing they were doing and other central banks were doing, that we were in an unprecedented time…one had to begin to think about how you defend yourself against inflation,” Chainalysis said.

The pros are coming

The numbers bear this out. Ever since bitcoin pushed past $10,000, the number of $1 million-plus transactions is up almost 20% compared to 2017. And those large inflows are heading mainly to exchanges serving the U.S. and Europe, where regulatory compliance is far stricter. 

“This is what we would expect to see, as the institutional investors driving the current surge, themselves primarily based in North America and Europe, are more likely to buy Bitcoin on these exchanges for both ease of use and regulatory reasons,” it added.

The upshot is that “first-time Bitcoin buyers and buyers looking to unload fiat currency for Bitcoin as a hedge against worrisome macroeconomic trends are responsible for much of the current demand,” Chainalysis concluded.

Ultimately, this means “investors have become savvier and more strategic, buying Bitcoin to fulfill a specific use case rather than to speculate on the new hot asset,” the firm argued.

That use case is “to be an effective hedge against macroeconomic trends,” it said, concluding “we believe more and more institutional investors will put money into the asset, leading to even more mainstream adoption.”

And that, in turn, will lead to higher prices.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.