The Liquidity Crisis – Part 1: BTC

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@benlillyJarvis Laboratories | Espresso Editor

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Bitcoin’s supply dries up through crypto. Here’s where it happened and what it means.

You’ve probably seen a chart or an analyst mention that there is a liquidity crunch in bitcoin.

If you’re not aware of what that means, this is a comment aimed at centralized stock holdings plunging in 2020.

Which means Bitcoin was, and still is, leaving the exchanges by the bucket load. In effect, this means that the amount of bitcoin available to willing buyers is running out. Which in turn creates a shortage, pressure of demand… And the reason many of us are here: higher prices.

Today I would like to lay down a few charts in front of you as you sip this morning’s espresso that show what this “liquidity crunch” is and what it means for the next boom and bust cycle.

Where did he go ?

Here is the graph which highlights the phenomenon of liquidity crisis. Focus on the blue line as it dips, showing us that the total BTC balance on exchanges has grown from around 3 million to just over 2.3 million from March 2020 until now.

This is about 23% less BTC floating on the supply side of the market than about a year ago.

For any investor sitting on the sidelines, a glance at this statistic cries out for scarcity.

But is this really a clear picture of what’s going on?

Didn’t this thing called DeFi pop up and create wrapped BTC on the Ethereum network? Is this where all the BTC went?

To take a look, here’s a graph from Dune Analytics showing the supply of BTC on Ethereum.

That’s just over 160,000 BTC on the Ethereum network… we’re about 475,000 BTC from where it all happened. Moreover, this actually only explains the drop in the foreign exchange supply from August to November.

Another thought is BlockFi and Celsius. However, deciding which wallet is held by these entities is a bit of an educated guess, so rather than making a guess, let’s just assume that “some” bitcoin is held in these vehicles.

Honestly, I don’t think this amount is as large as many believe. Here is BlockFi’s recent Bitcoin Trust product and its current assets under management of $ 57 million or nearly 1,200 BTC. Let’s keep these entities out of our substantive calculations for now.

The other place we can look is the ‘Prince of Pump’, Grayscale.

Here is an overview of their holdings from early June 2020 to now. That’s around 300,000 bitcoins. Wow.

Still, that leaves us around 175,000 BTC short.

To determine approximately how much BTC went into grayscale from February 2020 to June 2020, I went ahead and used my super-precise method of drawing red lines with the default photo editor of my computer.

Let’s call it $ 750 million in Grayscale Bitcoin Trust entries from February 2020 through June 2020 – where the chart left us hanging. Using the monthly closing prices, the average BTC price was $ 8,250. This means that around 90,000 BTC has been paid into the fund during this period.

That leaves us with around 85,000 BTC that haven’t been counted.

Tesla bought $ 1.5 billion worth of bitcoin in January. Assuming the purchase averages around $ 35,000, that’s over 42,000 BTC on the table.

MicroStrategy claims 71,000 BTC.

Ruffer Investment Co. landed 45k in November 2020.

That puts us at -73k on the back of the envelope math problem… But wait…

Several other entities also got their share: Square (4.7k), Bitwise (11.4k), Stone Ridge Holdings (10.9k).

Now we are in the red… -100k BTC. How is it possible?

Well, for further analysis we need to determine how many miners BTC went to the exchange and also look at each entity individually and make sure that the BTC actually left the exchange. Many exchanges also serve as custodians. This is a bit beyond the scope of a daily newsletter, and for our purposes we can clearly see that three distinct demographics are removing liquidity from trading: Grayscale, Firms, and DeFi.

What does it mean?

This means that bitcoin is actually becoming scarce. If this continues, a liquidity crisis will occur, pushing prices considerably higher.

Grayscale, as I’m knocking in the Grayscale effect coin, is a one-way vehicle where bitcoin enters and does not leave the Trust.

Companies like MicroStrategy are using bitcoin to combat the effect of record money growth through government currencies. Others have followed and will continue to follow in their footsteps. It’s not a month-to-month type of decision that takes place in a C sequel, it’s on the timeline of years. Inflation is coming, it’s just a matter of when.

Then there is DeFi. Which for me is the most interesting of the three because BTC is mainly used in DeFi to gain yield. Don’t trade. Similar meaning to Grayscale, it’s a sinkhole. Looking at the chart above which shows the amount of bitcoin trades on Ethereum, you can see that the growth is mostly one-sided, upward.

And with the opening of more platforms like Polkadot, Cosmos, and Solana, the potential for transferring more bitcoins to more platforms in DeFi protocols is even greater.

These three different industries currently absorb almost all bitcoin trading.

Which tells us two more things. Bitcoin is used as a hedge against the dollar aka “Gold 2.0” and it is used as collateral to earn a return. These are the strongest use cases for bitcoin right now. The Gold 2.0 narrative is openly discussed and adopted. I think the second use case will gain momentum in the second half of the bull run.


It is important to understand how investors can use BTC as collateral. Investors don’t need to sell BTC to mine its value. They can now do it through secured loans. By doing so, investors can potentially avoid the capital gains tax on their bitcoin while still benefiting from its price appreciation. And WHEN bitcoin is six digits, that begs the question …

Why sell?

That’s a question I’m pondering right now as I think about the possible scenarios in which this boom and bust cycle unfolds.

It is evolutionary thinking. One that I won’t have the answer to until he starts playing.

But listen to me for a moment on something …

What other asset provides near instant liquidity without needing a bank?

If I’m MicroStrategy and need a business loan, I don’t need a bank. I can literally write the loan to myself using Bitcoin.

This creates an entirely different category of investors who are not as speculative as in previous cycles.

Which brings us to today’s thought… If there is a liquidity crisis, who is selling?

Your pulse on the crypto,

Ben lilly

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