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Bitcoin's liquidity is under strain, with concerns mounting that governments may sell off their cryptocurrency reserves. A $33 billion supply overhang looms, as research suggests that holdings by the US, China, the UK, and Ukraine could fuel significant selling pressure in the coming months.
Bitcoin Faces Liquidity Decline as Government Crypto Reserves Fuel $33 Billion Supply Overhang
The cryptocurrency is experiencing a decline in liquidity and persistent concerns that governments may dispose of their cryptocurrency reserves as August concludes. Consequently, Bitcoin is trailing traditional assets, per Fortune.
Research company Kaiko noted that the US, China, the UK, and Ukraine are prospective sources of such disposals and creditors who received tokens from the collapsed Mt. Gox digital-asset exchange. The analysis suggests that this is a component of a potential $33 billion overhang in the Bitcoin supply.
Kaiko estimated that the US administration possesses approximately 203,220 Bitcoin, with China following with 190,000, the UK with 61,200, and Ukraine with 46,350. Ukraine is believed to have received donations to assist in funding its defense against Russia's invasion while governments seize tokens in criminal cases. Kaiko stated that Mt. Gox has approximately 46,170 tokens remaining for distribution.
“Supply overhang has been a topic in crypto markets throughout the summer,” Kaiko analysts Adam Morgan McCarthy and Dessislava Aubert said. Several “prominent holders could be potential sources of selling pressure in the coming months,” they added.
Bitcoin Market Volatility Rises as Liquidity Thins and Price Declines Amid Subdued Trading Volumes
A thinning of liquidity in the Bitcoin market, which can amplify price swings in response to large transactions, is accompanied by concerns about punchy sell orders. Against this backdrop, the digital asset has experienced a decline of approximately 8% thus far this month, in contrast to a 2% increase in global stock and bond indices.
“Spot market volumes for Bitcoin remain subdued, contributing to recent choppy price action,” Sean Farrell, head of digital-asset strategy at Fundstrat Global Advisors LLC, wrote in a note. He added that seasonal trends suggest activity typically picks up after Monday’s US Labor Day holiday.
One of the metrics Farrell identified is the seven-day average of Bitcoin turnover, calculated by dividing trading volume by the token's market value. This metric has decreased to approximately 2% from its apex of nearly 5% during the digital asset's record rally in March.
Despite inflows into US spot-bitcoin exchange-traded funds and increasing expectations that the Federal Reserve will loosen monetary policy in the coming weeks, Bitcoin experienced significant difficulty in August.
JPMorgan Warns of Deteriorating Liquidity in US Bitcoin ETFs as Trading Volumes Plummet
According to strategists at JPMorgan Chase & Co., the trading environment in the US Bitcoin ETF sector has also become more complex. This is partially due to the Hui-Heubel ratio, a metric intended to offer liquidity insights by quantifying the number of transactions required to shift prices.
“It is striking that this metric has been deteriorating for all spot-Bitcoin ETFs since March, pointing to overall deterioration of spot-Bitcoin ETF liquidity over the past six months,” the JPMorgan team, including Nikolaos Panigirtzoglou, said.
Bloomberg's data indicates that the combined daily trading volume of the US Bitcoin ETFs has decreased from over $10 billion in March to less than $2 billion.
Bitcoin remained unchanged at $59,535 as of 8:34 a.m. on August 30 in London, approximately $14,000 below its March high. Tokens such as Solana and Ether were varied.
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