A Supply Shock Scenario

A Supply Shock Scenario

By Lucasgaio | Cryptoscience | 22 Oct 2021


This is not an article meant to induce FOMO in the reader, please read it carefully.


We know everything about Bitcoin, both as a technology and as a trading currency. We know the maximum supply, how many are mined every hour and where they are held in large quantities. Furthermore, it is possible to know which are the addresses linked to exchanges or Whales. All this, when combined with a careful analysis of the demand by investors, can lead to a lot of speculation about the price. In this article, we will analyze some on-chain and demand-related data to see if the Supply Shock scenario is likely.

First of all, what is Supply Shock? It is a phenomenon in which an exponential increase in the price of an asset occurs upon the unexpected occurrence of a reduction in supply. In fact, this principle is fully explained by Wyckoff's first law, which holds that when demand exceeds supply, the price of the asset increases.

 

Reserves are falling

From the addresses of the wallets associated with exchanges, many more BTCs are coming out lately than those entering. In particular, reserves now amount to around 2.4M BTC. As can be seen, the performance of exchanges' reserves is inversely proportional to the price of the asset. This is because there are fewer and fewer coins available for purchase and whoever wants to buy them must be willing to pay more. Such a scarce reserve would expose Bitcoin to a possible price leg-up risk should a multitude of investors want to buy it all together. But is it possible that many buyers want to expose themselves to BTC all of a sudden?

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ETFs

The answer to the question above lies in ETFs. The approval of some Futures ETFs has brought a lot of FOMO, but the possible approval by the SEC of a Spot ETF (i.e. with a real value in Bitcoin) would lead institutional investors to allocate a part of their portfolios to Bitcoin. Unlike retail investors, institutional investors move much greater capital and their possible exposure to this asset would further reduce their liquid supply.

 

And So..?

In the past cycles of Bitcoin, after the halving there has been a period of rise in value for one or two years, where the price has undergone considerable increases up to 20 times. The reasons that led to these increases are different, but they all have two characteristics in common: the first is that of having induced in investors the fear of being excluded and the second is the direct cause of the first, that is the lack of supply due to increase in purchases. Since Bitcoin has a limited supply, downward swings in its curve cause the price to rise considerably.

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BUT

As many argue, Bitcoin is an asset that goes against inflation, but in some cases it proves much more, bringing real gain to its investors. Particular attention should therefore be paid to the sudden rise of Bitcoin as, given the premises, this is possible and probable. As seen in the past, however, the faster the climb, the faster the descent. This is meant to be a warning because many investors who will now come to this world will buy growing assets without thinking about it, caught up in the euphoria that will be unleashed.

 

Not a financial advice. 

DYOR before invest.

 

 

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Lucasgaio
Lucasgaio

I am a pharmacist and a scientist.


Cryptoscience
Cryptoscience

A blog that speaks about science, a passion that has accompanied me since I was a child. My goal is to spread scientific culture all over the world, starting with cryptocurrencies.

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