Bitcoin Faces Sell-Side Liquidity Crisis as Demand Reaches Unprecedented Levels: CryptoQuant

The likelihood that Bitcoin will face a sell-side liquidity crisis in the next few months is very high as demand for the digital asset surges to unprecedented levels.

According to a weekly report from CryptoQuant, analysts expect that current liquidity levels on Bitcoin's sell-side will meet demand for six to 12 months. Conversely, a decline in liquid holdings could pull the price of Bitcoin (BTC) higher.

Unprecedented demand

Monthly demand for Bitcoin has increased from 40,000 BTC at the start of 2024 to 213,000 BTC at the time of writing. CryptoQuant measures demand by 30-day growth in the total balance of accumulation addresses – those that only receive and hold BTC. For comparison, these addresses hold more than 10 BTC, have no outflows, do not belong to any centralized exchange (CEX) or mining pool, and have been active for the last seven years.

The dramatic increase in BTC demand is being driven by US-based Bitcoin exchange-traded funds (ETFs) and other large investors such as whales. Analysts have found that annual growth in the total whale population has reached its highest level ever. Whales now hold about 1.57 million BTC, a significant increase from 874,000 BTC at the start of 2024.

While demand increases, liquidity on the seller side continues to decrease. The BTC quantity in sell-side liquidity units is approximately 2.7 million BTC, down from the all-time high of 3.5 million BTC in March 2020. These units have viable and liquid assets from which investors can purchase BTC. Some of these include CEX's Bitcoin reserves, over-the-counter Bitcoin deposits, Bitcoin miners, and confiscated BTC owned by the US government.

Analysts also view Grayscale's GBTC Bitcoin holdings as selling liquidity as the ETF has expanded the BTC supply available for sale through massive investor redemptions. Without this fund, sell-side liquidity would have fallen to the lowest level last recorded in February 2018.

Impending liquidity crisis on the sell side

As Bitcoin demand skyrockets and seller-side liquidity declines, Bitcoin's liquid inventory as measured by monthly demand has fallen to its lowest level ever.

“We estimate that current liquidity levels on the sell side of Bitcoin are only sufficient to meet demand, which is growing at the current rate, for twelve months. “This only takes into account demand from rising addresses, which can be considered the lower end of Bitcoin demand,” explained CryptoQuant.

Removing BTC from non-US CEXs would further reduce Bitcoin liquidity holdings to six months as US spot ETFs would only source BTC from local companies.

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