With Bitcoin's growing presence in traditional financial systems and speculation surrounding the US's strategic reserve of BTC, some experts predict a major supply shock could occur this cycle, potentially breaking the four-year cycle theory with extraordinary price increases.
However, a new report suggests that such a supply shock is unlikely to occur by 2025.
Bitcoin Supply Analysis from Long Term Hodlers (LTH)
Despite the Bitcoin halving event, the growing interest from institutions, and the emergence of spot Bitcoin ETFs in the U.S. spurring discussions about limited supply, detailed data reveals a different outlook, according to CEX.IO's report. The combination of long-term holder (LTH) activity, ETFs, and evolving liquidity trends indicates a robust supply ecosystem capable of mitigating potential shocks.
Source: CEX.IO
The crucial aspect of this assessment is the behavior of LTH supply after each halving event. History shows that halving events typically trigger significant movement of Bitcoin from LTH to short-term holders (STH), thereby increasing market liquidity. In 2024 alone, the dominance of LTH supply has decreased by 9%, freeing up 1.58 million BTC into the market.
With the average dominance rate of LTH decreasing by 16% in previous post-halving cycles, it is forecasted that approximately 1.4 million BTC will shift from LTH to STH by 2025. The report explains that this will help meet the increased demand from institutions or governments, through significant profit-taking by LTH, alleviating supply scarcity.
Source: CEX.IO
ETF volatility, OTC activity, and market liquidity
The activity of ETFs, which are seen as a potential driver for supply shock, upon closer analysis, do not create significant volatility in the spot market. Although U.S. spot Bitcoin ETFs accumulated over 1.13 million BTC by 2024, much of this accumulation comes from cash-and-carry* trades and is settled in cash rather than direct investments with clear and specific objectives. These arbitrage strategies, relying on derivative products like CME futures contracts, help balance supply and demand without exerting direct pressure on the spot market.
Source: CEX.IO
Furthermore, ETFs currently account for less than 4% of the total trading volume of Bitcoin, which further diminishes the likelihood of causing a widespread supply imbalance.
Market liquidity and Bitcoin reserves on exchanges also play a vital role. Although Bitcoin reserves on exchanges have dropped to record lows in 2024, most withdrawals are for cold storage rather than panic selling, reflecting long-term confidence in Bitcoin.
In parallel, OTC platforms have increased their holdings to over 200,000 BTC, indicating a redistribution of liquidity rather than a complete depletion. This diversification, combined with stable daily transaction volumes, demonstrates a balanced and dynamic market.
Finally, market depth indicators show that liquidity conditions are improving significantly. Growing resilience is evident through a 61% increase in liquidity measured in USD in 2024, despite a decrease in market depth measured in BTC. With major exchanges solidifying their market share and U.S. platforms expanding their dominance, the current liquidity landscape is well-positioned to meet growth demands in 2025.
Overall, these factors reinforce the conclusion that Bitcoin supply remains stable, making a significant supply shock unlikely in the coming year. The report also emphasizes that the market is prepared for steady growth within the established 4-year cycle.
*Cash and carry trade is a trading strategy where an investor exploits the price differences of Bitcoin across different exchanges or between Bitcoin and similar assets to generate profits. An investor can buy Bitcoin at an exchange where the price is lower and simultaneously sell Bitcoin at another exchange where the price is higher, capitalizing on the price difference between markets. Alternatively, they can buy Bitcoin and simultaneously short a similar asset, such as Bitcoin futures contracts, to take advantage of the price spread.
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