Bitcoin is facing a sell-side liquidity crisis as demand reaches unprecedented levels: CryptoQuant

As demand for the digital asset surges to unprecedented levels in the next few months, there is a very high chance that Bitcoin will face a sell-side financial crisis.

According to a weekly report by CryptoQuant, analysts expect the current Bitcoin sell-side liquid inventory to cover six to twelve months of demand. Conversely, a dip in liquidity could drag the price of Bitcoin (BTC) northwards.

Unprecedented levels of interest

Monthly demand for Bitcoin has risen from 40,000 BTC to 213,000 BTC at the time of writing in early 2024. CryptoQuant measures demand by the 30-day growth of the total balance of address reserves – those that receive and hold BTC. For context, these addresses hold more than 10 BTC, have no flow, are not part of any centralized exchanges (CEXs) or mining pools, and have been active for the past seven years.

The dramatic increase in demand for BTC is led by Bitcoin exchange-traded funds (ETFs) in the United States and other large holders such as whales. Analysts have found that overall, year-over-year growth in whale stocks is at its highest. Whales now hold approximately 1.57 million BTC, a significant increase from the 874,000 BTC recorded in early 2024.

As demand continues to increase, sell-side liquidity will continue to decline. BTC volume hovers around 2.7 million BTC on sell-side liquid entities, compared to a peak of 3.5 million BTC recorded in March 2020. These entities have viable and liquid assets from which investors can purchase BTC. Some of them include CEX's Bitcoin reserves, Bitcoin over counters, Bitcoin miners, and BTC held by the US government.

Analysts also consider Greyscale's GBTC Bitcoin holdings as sell-side liquidity as the ETF has increased the supply of BTC for sale through massive investor redemptions. Without this fund, sell-side liquidity would have fallen to its lowest level, last seen in February 2018.

A looming sell-side liquidity crisis

As demand for Bitcoin rises and liquidity on the sell side falls, Bitcoin liquidity falls to record lows relative to monthly demand.

“We estimate that the current supply of Bitcoin sell-side liquid reserves is sufficient to cover the growing demand for twelve months at the current rate. This is only taking into account the demand of collecting addresses, which can be considered as the low-end of Bitcoin demand,” said CryptoQuant. .

Since US spot ETFs BTC only originates from local entities, removing BTC on CX outside of the US reduces Bitcoin liquidity to six months.