Bitcoin Is Facing Serious Supply Shortage: Here’s Everything You Need To Know

Meghna Das  |  Oct 10, 2021

Bitcoin has come a long way. It is not only the largest cryptocurrency but also one of the largest currencies in the world. And even though after the news of the Chinese crypto crackdown, Bitcoin, along with the entire crypto space came crashing down, things are looking up for the world’s first crypto coin. In terms of market value, the world's largest cryptocurrency climbed 4.6% to $53,859.6. This week, it surpassed $50,000 for the first time in four weeks, owing to increased institutional interest. 

Now with this growing popularity and acceptance, imagine a time when Bitcoin is facing a supply shortage. This is what is happening. Bitcoin's limited supply is one of its most appealing features; there will only ever be 21 million coins, but the current quantity is 18.7 million. However, the amount of bitcoins accessible for purchase and sale is far lower. For a variety of causes, such as early miners losing their hard drives or bitcoin owners passing away and taking their private keys with them to the grave, crypto research firm Glassnode predicts that three million bitcoin (or 16%) might be lost forever. This is happening when people are considering investing or purchase bitcoin.

Now that we are going to face the target of 21 million soon, Bitcoin is facing an extreme supply shortage. “One of the key factors contributing to the supply shortage is the rapid accumulation of bitcoin by institutions for treasury purposes,” said Revix CEO Sean Sanders. Let’s understand what this means for the price of Bitcoin in the future. 

The Explanation of Bitcoin Supply Shortage

There is 1.125 million Bitcoin mined by Satoshi Nakamoto, the enigmatic originator of the cryptocurrency. This reduces the available supply by another 6%.

The growth of the institutional 'HODLer' (those 'hanging on for dear life), who regard bitcoin as a store of value in a time of financial turmoil, is significantly more significant. Glassnode stated:

“Quantifying bitcoin’s liquidity is essential to understand its market. If many bitcoins are illiquid, a supply-side crisis emerges – which has a weakening effect on BTC’s selling pressure in the market. Or put differently: a sustained rise of illiquid bitcoins is an indication of the strong investor holding sentiment and a potentially bullish signal.” 

The advent of exchange-traded funds (ETFs) like Grayscale Bitcoin Trust, which provides investors with an indirect way to bitcoin via a listed entity, is one explanation for the dwindling supply.

Many investment firms are forbidden from participating directly in Bitcoin, but they can invest in a listed vehicle that provides Bitcoin exposure while taking care of custody, listing, and regulatory obligations. A variety of exchange-traded products (ETPs) operating in Europe now provide convenient and regulated access to bitcoin.

Bitcoin is currently in far more demand than it is available. About 900 new bitcoins are created every day, and because of high investor demand, three market participants alone — PayPal, MicroStrategy, and Grayscale Bitcoin Trust – purchase significantly more than 900 bitcoin every day. If this trend continues, which we expect it will, the leading cryptocurrency will see considerably higher prices.

At the same time, the hazards of investing in bitcoin—specifically, the risk of theft—have significantly decreased over the last three years, with the US Office of the Comptroller of the Currency allowing national banks to provide cryptocurrency services. Several banks have begun to offer institutional bitcoin custody services, including deposit-taking, custody, and fiduciary services. All these reasons add up to why Bitcoin is facing a supply shortage. 

What Will Happen if Bitcoin Reaches its 21 Million Limit?

The obvious effect that we all are going to have after Bitcoin reaches its limits is that the price of the token is going to surge. Another one is that the most important sources of money for miners are block rewards and transaction fees, with the former being more essential than the latter in the current system. Because miners may sell their reward stockpiles in cryptocurrency marketplaces at high rates, they can cover operational costs and maintain corporate profitability. A simple supply and demand problem!

When Bitcoin approaches its limit, the reward levels may not be sufficient to pay miners' operating costs, let alone create profits. Bitcoin awards are expected to evaporate if and when the supply limit is met.

Transaction fees are expected to fill up the slack in both cases. The quantity and mechanism of these fees are determined by the current status of Bitcoin's network, i.e., whether it is being utilized as a medium of exchange or a store of value. The former scenario might result in affordable fees to allow Bitcoin to be used in everyday transactions, but the latter situation would result in miners executing fewer and more expensive transactions.

Will Ethereum Gain From This?

Ethereum is one of the best competitors of Bitcoin. Siddharth Menon, COO of WazirX, said Ethereum can outperform Bitcoin in returns but not in market cap. "Bitcoin will still hold the largest share and will remain dominant," he added.

According to Sharan Nair, the chief business officer of CoinSwitch Kuber, Ethereum's price has risen due to a slew of DeFi initiatives in the area. Analysts, on the other hand, believe that the recent update has reduced the supply of Ethereum, resulting in the token's fast fluctuation. However, it will not be able to dethrone Bitcoin.

Conclusion

Therefore, to answer the question of whether Bitcoin will lose or gain from it, We think it is safe to say that Bitcoin is only going to gain from this. When the supply goes down, the demand is going to increase with each passing day. In other words, the supply shortage is a boon to Bitcoin and the crypto space in general. 

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