As an investment proposition, one of Bitcoin's (BTC -2.12%) primary appeals lies in its ability to preserve wealth over the long term. While this perception of Bitcoin is evolving, there is no denying that its capped supply of 21 million coins makes it an ideal store of value.
Yet when diving a little deeper, it becomes clear that Bitcoin will likely provide more benefits to holders than only being a store of value and could instead provide significant price appreciation. With the cryptocurrency's price already up almost 400% in the last five years, developing dynamics in Bitcoin's supply and demand could send its price to levels not seen before.
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A dwindling inflation rate
Currently, there are approximately 19.5 million bitcoins in circulation, with the remaining 1.5 million set to be minted at a diminishing rate over the next 120 years. To accomplish this, Bitcoin is hardwired with a mechanism known as halvings, a distinctive feature that sets Bitcoin apart from other cryptocurrencies and has led to its reputation as a premier store of value.
Every 210,000 blocks, or roughly every four years, the rate at which new bitcoins are created is cut in half. In Bitcoin's early days, every time a miner successfully mined a Bitcoin block, 50 bitcoins were minted. But after 14 years and three halvings, only 6.25 bitcoins per block enter the market today.
While it is clear that a pattern of reduced inflation rates benefits an asset's price, the true extent of Bitcoin's available supply can't be portrayed by only analyzing its halvings.
Exchange balances are at all-time lows
It would be plausible to assume that the number of bitcoins available would fall with each halving. Yet historically, the number of coins available has actually outpaced demand. Evidence of this can be found in data from Glassnode, a blockchain intelligence platform, which reveals a steady increase in the number of coins held on exchanges from 2013 to 2020, peaking at 3.2 million.
However, since the May 2020 halving, which reduced Bitcoin's inflation rate from about 4% to 1.75%, the number of coins available for purchase on exchanges has significantly declined. Currently, there are only 2.2 million coins on exchanges, marking a substantial drop.
Hodl, hodl, hodl
The most apparent explanation for the dwindling number of available coins would be a shift in the balance between supply and demand. While the impact of the pandemic likely played a role, and trends in adoption increased demand for Bitcoin, this supposition fails to paint the full picture of Bitcoin's decreasing supply.
The most likely culprit explaining the decreased amount of bitcoins available is the widespread strategy used by investors to buy and hold, better known as "hodling." Hoping that demand will increase over time, Bitcoin investors have proven remarkably stubborn, continuing to hold their assets even amidst market turbulence.
Evidence of this can be found by evaluating the number of dormant bitcoins. Data shows that nearly 70% of all bitcoins have not moved in the last year, while 40% have remained untouched for the past three years. Astonishingly, 30% of bitcoins have been idle over the last five years or longer.
Data by TradingView.
These levels of holding are even more extraordinary when considering the debacles that plagued the crypto industry last year. As companies and exchanges imploded, Bitcoin holders remained resilient, continuing to hold even as its price slumped more than 60%.
Mounting pressure
Contrary to the notion that 19.5 million bitcoins are available for purchase, the reality is that this number is much lower and will likely continue to trend lower with time. Pending some unforeseen scenario, investors should plan on Bitcoin's supply to become even more scarce, especially when considering the imminent entry of institutional investors.
While Bitcoin historically has been predominantly purchased by retail investors, financial giants such as BlackRock and Fidelity are on the verge of entering the market as they aim to create the first spot Bitcoin exchange-traded fund. If these firms receive approval, it would open the doors for tens of trillions of dollars previously sidelined on Wall Street eagerly waiting to gain exposure to Bitcoin, potentially amplifying the demand and driving its price even higher.
With another halving expected in spring 2024, clear signs of increased demand, and remarkable holding trends, there are favorable tailwinds forming in the coming years that could propel Bitcoin to unprecedented levels. Although its price is currently more than 50% below its all-time high, a valuable opportunity presents itself for investors looking to secure their share of the limited 21 million coins.
