March 5, 2021

78% of Bitcoin's supply is not liquid

An estimate of the volume of liquid and illiquid supply of BTC and the relationship of these indicators with the price of Bitcoin.

Number of available at any given timebitcoin is predetermined initially according to the design of the protocol. While 88.5% of the total supply has already been mined, at the beginning of 2021 the volume of BTC in circulation is ~ 18.6 million units.

However, the number of bitcoins actually availablefor buying and selling is actually much lower. Not only is it safe to say that a significant amount of mined BTC is irretrievably lost (we estimate their amount at ~ 3 million BTC), but as bitcoin continues to gain more weight as a store of value, and investors are increasingly using it as a safe an asset to maintain its fortune, the actual "liquid" supply of bitcoin could be even lower, and much more.

Quantifying Bitcoin's liquidity is veryimportant for understanding its market. If a large number of bitcoins are illiquid, a supply crisis occurs, which has a debilitating effect on selling pressure in the BTC market. Or to put it another way, the steady rise in illiquid bitcoin is a sign of confident investor optimism and a potentially bullish signal.

Bitcoin Liquidity Assessment

To quantify the liquidity of Bitcoin,we focused our attention on the actors participating in his network. By such entities, we mean individuals or companies that control one or more addresses on the Bitcoin network. Since it is the network actors who control the supply, it is their behavior that determines whether their BTC contributes to the overall market liquidity or not.

For example, consider long-term investors,who keep their BTC in a cold wallet and do not intend to sell them for a long time. The BTCs they control are effectively withdrawn from the liquid portion of the bitcoin supply that is circulating and available for trading. On the contrary, exchanges, with their constant inflows and outflows of funds, directly contribute to the pool of liquid asset supply.

As an indicator of the entity's liquidity, wewe use the ratio of the aggregate outflow to the aggregate inflow of funds to the wallets of the subject during the entire period of their existence. This ratio gives the number L between zero and one.The higher the value, the higher the entity's liquidity. Thus, an entity's liquidity expresses the degree of activity with which it spends the assets it receives. Illiquid entities tend to accumulate coins in anticipation of a long-term rise in the BTC price.

That is, for a hodler who never sells his bitcoins at all, the indicator L will be zero. On the other hand, a very active entity that regularly buys and sells BTC - like an exchange for example - will have an asymptotic value L ~ 1.

Note that the subject covering the entirehis position on bitcoin will have a value of L = 1. However, since his offer becomes zero (he has used up his entire stack), such an entity will not be counted in the analysis.

It should be emphasized that "internal" transfers between your wallets are also not included in our calculation of the value L... This condition provides a more accurate picture of the actual liquidity of the asset, since L subject cannot be artificially increased foraccount of internal transfers between your accounts. An example is the movement of large volumes of BTC between wallets of the same exchange - when creating new cold wallets or simply rebalancing funds.

We distinguish three categories of entity liquidity:

  • illiquid: L <0.25;
  • liquid: 0.25 ≤ L <0.75;
  • highly liquid: L ≥ 0.75.

However, as we already wrote in the article about volumesBTC controlled by short-term and long-term investors, such sharp classification thresholds can lead to artifacts in the resulting data when statistically significant subjects unexpectedly cross the thresholds in one direction or another. Despite other similar approaches put forward by other researchers, we use a more advanced methodology for assigning liquidity classes using weights from logistic functions with midpoints centered around thresholds (see. fig. one), which provides a smoother transition between the specified categories of liquidity.

Figure 1 - Logistic functions showing the weights that are used to classify the Bitcoin supply into highly liquid (red area), liquid (orange), and illiquid (blue).

Distributing the proposal of the subjects into threeliquidity baskets according to these weights, we get the volume of illiquid, liquid and highly liquid BTC supply. For example, if an entity has spent 25% of all BTC that he received during his on-chain history, then the amount of BTC controlled by him will be distributed 50% to the liquid and 50% to the illiquid basket.

results

After analyzing the entire volume of bitcoins issued in circulation using the methodology described above, we got the following picture:

Figure 2 - Classification of the Bitcoin supply into highly liquid (red area), liquid (orange), and illiquid (blue) over time.

At the beginning of 2021, the numbers are as follows:

  • Illiquid offer: 14.5 million BTC;
  • Liquid offer: 1.2 million BTC;
  • Highly liquid offer: 3 million BTC;

This means that about 78% of the Bitcoin supply is classified as illiquid.

Only 4.2 million BTC (22%) is currently in constant circulation and available for buying and selling.

It is worth paying attention to how this trenddeveloped in the past. Looking at the change in supply in each category since the beginning of 2020, we see a clear upward trend in the illiquidity of the Bitcoin supply. This suggests that the overwhelming illiquidity of the supply lies at the heart of the current bull market.

In 2020, more than 1 million BTC moved into the category of illiquid offers.

Figure 3 - Change in the amount of BTC in liquidity classes from January to December 2020. Blue chart - illiquid, orange - liquid, red - highly liquid supply.

Liquidity as measured by our methodology has a clear relationship with the BTC market. Looking at the cumulative change in liquid and illiquid BTC since 2017 (fig. four), you can see that the illiquid offertends to contract during bear markets and increase during bull markets (and vice versa for liquid supply). Note that the orange liquid supply curve in the chart below includes both liquid and highly liquid supply using the above methodology.

Figure 4 - Change in the amount of BTC by classliquidity from January 2017 to December 2020. Blue chart - illiquid, orange - liquid supply. Note: A liquid offering here includes both a liquid and a highly liquid offering according to the above methodology.

Another way to look at this is through the relative growth (%) of liquid and illiquid supply, as well as its relationship with the growth of the total supply of coins in circulation (fig. five). Please note that the liquid part of the supply has been in a constant downtrend for 9 months now, having decreased during this time from 30% to 12% - an indicator not seen since 2017.

Today we are in a situation where the illiquid supply of BTC is increasing faster than the total volume of coins in circulation is growing. A similar pattern was observed during the 2017 bull rally.

Black chart - total supply, blue - illiquid, orange - liquid supply.

Conclusion

We are introducing a new methodology for quantifying the amount of illiquid bitcoins and therefore the liquidity available for trading at any given time.

Our analysis shows that today78% of the volume of Bitcoin in circulation (14.5 million BTC) can be classified as an illiquid supply. The downward trend in liquid supply has been on the rise throughout 2020 and is shaping a potentially bullish picture for the coming months as the amount of BTC available for purchase has declined.

Understanding the liquidity of Bitcoin is an important macro signal that has a clear relationship to the price of BTC.

Glassnode liquidity metrics are available in real time on the Glassnode Studio website.

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