Bitcoin Liquidity

in LeoFinancelast month

Quite some time ago Glassnode guys made an article about Bitcoin "liquidity" claiming that 78% of total BTC supply is "not liquid". I've seen quite a few posts everywhere pointing to this article as an indication for the future BTC shortage and price pump. I thought I could add my two sats to that too.


Traditionally, Investopedia defines liquidity like this:

Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.

I would say that from the traditional point of view Bitcoin is a rather illiquid thing, and this illiquidity has nothing to do with pump and shortage, quite the contrary, actually. However, since Bitcoin lives mostly in hyperreality, now I will not go into details of its orthodox liquidity.

Glassnode guys proposed their own definition of Bitcoin liquidity:

In order to quantify the state of Bitcoin liquidity, we focus on Bitcoin entities. Entities are individuals or institutions that control a set of addresses in the Bitcoin network. Since it is the entities that control the supply, it is their behavior that determines whether their BTC contributes to the total liquidity or not. ... As a measure of an entity's liquidity, we use the ratio of the cumulative outflows and cumulative inflows over the entity's lifespan. ... Liquidity is therefore the extent to which an entity spends the assets it receives. Illiquid entities are those that hoard coins in anticipation of a long-term BTC price appreciation. ... Our analysis shows that currently 78% of the circulating Bitcoin supply (14.5 million BTC) can be classified as being illiquid. A trend that has been increasing over the course of 2020 and paints a potential bullish picture for Bitcoin in the upcoming months, as less BTC are available in the network to be bought.

Actually, the guys started to talk about Bitcoin liquidity and ended with entities liquidity. But who cares, anyway. So I suppose we have an idea that the less "the hodlers" send their BTCs out, the less liquid BTC becomes. And currently, 78% of the total BTC supply is held by the hodlers who spend less BTC than they receive (and this can result in BTC shortage and price pump). Well, maybe I understand the article all wrong, though.

I'd like to note that there's a shortage in BTC supply -- quite a large amount of coins is lost forever. Forgotten passwords, formatted HDDs, coins sent to a wrong address, you know. Nobody knows for sure how many BTC are lost, but I've seen estimates up to 30% of the total supply (i.e. ~6M BTC). These coins are still visible in the blockchain, but they can't be moved (as of now, at least), and in particular, they can't be traded.

I believe most of BTC was lost long ago. For example, some guy was enjoying himself tossing BTC back and forth in 2011, the next year he got a girl and left his 10K BTC for good because the girl wasn't much impressed about cryptocurrencies and there was not much use for BTC at that time anyway, then in 2017, he learned that he forgot his password. On the other hand, the guy who created a wallet in 2019 and bought 0.1 BTC in there has hardly forgotten his password. As far as I can understand, from Glassnode's point of view, the former entity would be considered liquid, while the latter is illiquid. Meanwhile, we will hardly ever see the first guy's BTC at an exchange, but the second guy would gladly dump his pennies at Glassnode's followers on good occasion.

Therefore, I would propose an alternative methodology of calculating BTC "liquidity" (I mean liquidity in Glassnode's terms, and not in Investopedia's orthodox terms) based on the age of wallets and their transactions. That is, the older a wallet and its last transaction are -- the less liquid its BTCs are. Simply because the older a wallet and its last transaction are -- the more probable it is that these BTCs are lost because of a forgotten password or something. Of course, this methodology can be ruined by a BTC hodler who's had balls of steel to keep his BTC pile untouched for a decade. But generally, the balls of steel is a kinda scarce thing, you know.

Unfortunately, I have neither time nor resources to make a nice article based on the proposed methodology. Maybe someone has already done it somewhere. Or maybe someone will pick the idea up and make some nice research.

Otherwise, it's good to know that a shitload of newly purchased BTCs is only several hours away from hitting the exchanges, even if Glassnode guys consider them illiquid.

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