Despite the current sideways movement and flashes of weakness, on-chain data suggests that Bitcoin might rally in the days ahead. The upswing for the world’s most valuable coin will be driven by several factors, including dwindling exchange liquidity and rising institutional demand.
Bitcoin Liquid Inventory Ratio Is Falling
In a post on X, Ki Young Ju, founder of the popular cryptocurrency analysis platform CryptoQuant, shared data indicating that the Bitcoin Liquid Inventory Ratio has hit an all-time low. This ratio considers Bitcoin holdings across all major exchanges and the Grayscale Bitcoin Trust (GBTC). It measures the amount of BTC readily available for trading across leading exchanges.
When this ratio drops, it often signals a crucial shift in the Bitcoin market. For one, it shows that the supply of Bitcoin available for purchase on exchanges is much lower than historical levels. Therefore, considering the current demand, the resulting imbalance can trigger price volatility since buyers now have to compete for a limited pool of available BTC.
Historically, periods of low exchange liquidity for Bitcoin have often coincided with price surges. With fewer coins readily available, each buy order tends to increase prices.
The Rise of Spot Bitcoin ETFs
While the Bitcoin Liquid Inventory Ratio falls, there is growing demand for spot Bitcoin exchange-traded funds (ETFs) in the United States. The derivative product allows the issuer to mint shares and sell them on bourses to institutions and even retailers. The United States Securities and Exchange Commission (SEC) regulates this product.
A given amount in BTC goes back to each share. This means that the number of shares minted is directly proportional to the Bitcoin the issuer can acquire. If supply drops, prices must rise to match demand.
Because spot Bitcoin ETF holders are relieved of the hassle of securing the private keys of coins, investors, particularly institutions, might choose to hold Bitcoin through these ETFs instead of keeping it on exchanges. This would further reduce the readily available supply of Bitcoin for trading.
If the current high demand for Bitcoin persists, coupled with withdrawals from exchanges to non-custodial wallets and a potential shift to spot Bitcoin ETFs, a supply crisis could be brewing.
Notably, exchange liquidity appears to be falling ahead of the Bitcoin halving event in mid-April 2024. Coupled with the optimism that prices will likely, it is highly likely that BTC prices might find support, erupting to new levels in the sessions ahead.
Feature image from Canva, chart from TradingView
