Is There A Bitcoin Supply Shortage?

Is there a bitcoin supply shortage on exchanges?

Yes and no.

The bitcoin balance on exchanges has received a lot of attention during this bull run because the change in these balances sticks out. In previous bull runs, what can be observed is that, often, with bitcoin’s price increasing, the bitcoin balance on exchanges has increased. This can be seen in Figure 1 where Glassnode has compiled the addresses of spot exchanges holding bitcoin and aggregated them.

Even with bitcoin’s price going sideways or down, historically, the trend has been upward. This trend has reversed during this bull run, and since March 2020, the bitcoin balance on exchanges has been in a declining trend. This trend has been going on for over a year now. Compared to that in, or right before, the last bull run, the fall in exchange balance from July to December 2016 lasted only six months, before taking off in 2017 with bitcoin’s price taking off as well. If the underlying dynamics have not changed, and the exchange balance drop in 2016 and what followed in 2017 is an indication, the prolonged decline in exchange balances this time might be a set up for a major bull run. This is not the topic of this article, but that trend is majorly driven by outflows from Coinbase and thus highly likely by institutional and large investors. This indicates that bitcoins might not flow back to exchanges in bigger amounts any time soon before hitting this cycle’s top. So the patterns might not repeat as in 2016/2017, and bitcoin could hit a new all-time high with the bitcoin balance on exchanges declining.

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