Bitcoin Facing Bullish Supply Constraints

Summary

• Technical analysis suggests that the month-long consolidation period in Bitcoin price will end in 1-2 weeks.
• Miners are no longer selling Bitcoin because they have successfully covered operating costs.
• Institutions are pulling Bitcoin into long-term cold storage at a pace never before seen in previous market cycles.
• This double supply constraint suggests we are in for a price rally.

On-chain analysis examines network activity to make a case for short to medium-term price action. It can be a powerful tool when combined with technical analysis and an overall bullish narrative of an emerging asset class.

In my recent article regarding cycle end date, I examined the number of blocks mined since the halving event. This article examines two additional on-chain metrics to make a short-term determination regarding Bitcoin price action: miner net position change and balance on exchanges. Both of these metrics point to less selling pressure on the Bitcoin network and serve as bullish tailwinds.

The technical setup

Bitcoin has been in consolidation mode since reaching its all-time high of $61,556 on March 13, 2021. As the massive wedge below suggests, it will break this pattern before April 20. Technically, this is a bullish setup. When examined in conjunction with the bullish on-chain indicators below, it only reinforces the idea that we will witness a bullish breakout in the weeks that follow.

Miner net position change

Bitcoin miners can be net sellers or net holders. In some regards, miners are forced sellers despite their bullishness on price. They must sell to cover operational costs in electricity, land usage, and equipment upgrades. The chart below indicates that mining pools have, in aggregate, stopped selling. This is most likely due to the fact they covered their costs and can now focus on accumulation.

(Source: bitcoinist.com)

As the chart above suggests, position changes in Bitcoin mining pools can massively affect price action. Heavy miner selling pressure in January led to a 31% correction from peak to trough. As soon as mining selling pressure relented, the price began appreciating again. Also note the two week delay from when miners began selling to a peak in price action. This delay coincides with the tentative late April chart pattern break. Mining pools entering accumulation mode as they successfully covered their operating costs is a form of supply reduction.

Balance on exchanges

The major driver of this cycle is institutional buying. Publicly listed companies such as MicroStrategy (MSTR), Square (SQ), and Tesla (TSLA) have Bitcoin on their balance sheets. Hedge funds such as Skybridge Capital, insurance companies such as MassMutual, and the New Zealand pension system have all added Bitcoin allocations. Goldman Sachs (GS) and JPMorgan (JPM) will begin offering Bitcoin to their wealth management clients in 2021 and the former has already launched a cryptocurrency trading desk. A percentage of every type of institutional investor has allocated funds to Bitcoin, which speaks volumes of the institutional entrenchment necessary to prevent hostile government action.

On average, large institutions do not take the counterparty risk of leaving coins on exchanges due to their massive positions. The chart below demonstrates that the number of Bitcoin being held on exchanges continues to reduce at a pace that did not occur in previous bull market cycles. This trend is driven by institutional buyers taking their Bitcoin offline in a process known as cold storage. In fact, $10 billion of Bitcoin has gone offline in the last four months.

(Source: bitcoin.com)

Cold storage involves pulling one's Bitcoin off of exchanges and securing them offline in a hardware wallet, paper wallet, desktop wallet, or USB drive. A hardware wallet such as Ledger Nano X or Trezor is the most popular option for most investors. When held on an exchange, the exchange custodies the investor's Bitcoin and has access to his or her private keys. Most investors do not have an issue with this.

For individuals or institutions who have large positions or significant net worth tied to Bitcoin, cold storage is recommended to avoid counterparty risk. It is the equivalent of self-custody for physical gold. The investor must safeguard his or her private keys and hardware wallet device, but there is no risk of exchange hacks or the custodian somehow taking one's Bitcoin.

Institutions pulling their Bitcoin offline is significant because these Bitcoins are permanently pulled away from the market reducing the supply in circulation. Cold storage is a method of long-term safeguarding. It makes no sense for an institution to go through the process of pulling their Bitcoin offline only to put them back online months later. Hot storage (keeping Bitcoin on an exchange or internet connected mobile wallet) and cold storage is similar to a checking and savings account. Short-term money for transactions or trading is held in a hot wallet, long-term money is held on a cold wallet.

Conclusion

On-chain analysis indicates that Bitcoin is facing a double supply shock. Miners are pulling Bitcoin out of circulation now that they have covered operating costs and institutions are pulling Bitcoin out of circulation for long-term safeguarding in cold storage. After this necessary consolidation period, I expect a bullish continuation based on these supply shocks.

Analyst’s Disclosure: I am/we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[immature-kid]

Still trying to understand. What will happen to bitcoins when someone dies or not able to recover bitcoins due to loosing password etc. Does this mean the total available number of bitcoins will progressively diminish if people keep loosing bitcoins?

[HamishMacEwan]

@immature-kid asked "Does this mean the total available number of bitcoins will progressively diminish if people keep loosing bitcoins?"

Yes.

[Jethroe1]

@immature-kid Morning, kid. It is true that 20% of all coins ever mined are suspected of being lost, and out of circulation. I would say, though, that most data shows those coins were lost when Bitcoin was just starting out. And that makes sense, doesn't it? I mean, when Bitcoin was a nickel, many people lost custody, mainly because they didn't care. Also, the support system for custody of Bitcoin just didn't really exist in the early years. Today, there are multiple sources of hardware wallets, stainless vaults for seed phrases, and of course, secure exchanges that will allow you to move your Bitcoin into storage on the exchange.

Still, some people continue to lose their private key. Not many, at $60k a Bitcoin, but it still happens. Which of course means that you are the bank, and need to take that job pretty seriously, ha.

Also, I think the diminished coins you reference will not be affected by loss that much going forward, but that the real source of scarcity is that the coins are being bought up and removed from circulation.

[immature-kid]

@Jethroe1 thanks sir

[Dale Roberts]

Bitcoin is making a nice move above $60,000. Many of the models suggest $100,000 or up to $250,000 in 2021.

We'll see. Nobody knows for sure. I'll be happy to take some profits along that route. I treat it like any other portfolio asset.

Investing in bitcoin is a no brainer.

cutthecrapinvesting.com/...

Dale

[Jethroe1]

@Dale Roberts Plan B has an average price point of $288,000 over the cycle. Willy Woo recently mentioned $400,000. If you rebalance as most portfolio management suggests, I believe you will regret it, Dale. I finally understand where HODL came from, and the psychology behind it.

[Sleepless in Seattle]

@Jethroe1: Hold On for Dear Life.

[Dale Roberts]

@Jethroe1 I will make money through each cycle. It's all of no use to me if I can't spend some of my profits.

It is a portfolio asset and to be treated like any other portfolio asset, for me.

Volatility will likely rule forever.

Still long term HODL.

Dale

[SomeGuy14]

Tether gotta print. $3B last week. Backed by nothing. Yet, no longer able to move BTC price.

$1B daily prints incoming. How long can they hold the peg? That'll be the moment the whole pyramid collapses.

[Rjm13]

The stock market , the “fed” , the government , are the hoaxes not bitcoin

[Dale Roberts]

@Rjm13 Well said, but I will also play the game that they rig and try to protect. Take the money of others and move it to safety.

Dale

[Edelhart]

@Dale Roberts what exactly is "safe"?

[Dale Roberts]

@Edelhart A mix of assets, dividend into buckets that work in each economic quadrant. Something is always working.

That will include always holdings some bitcoin.

Dale

[m63333]

Crypto and precious metals are a great one two punch to protect against the fiat madness

plywood around $80 but no inflation according to the Fed

[Martin_ibk]

This is the biggest hoax in human history. You can still make money with it but you'd better keep in mind that the true value of Btc is zero. Have fun!

[Rjm13]

@Martin_ibk the true value of your comment is 0

[Sleepless in Seattle]

@Martin_ibk: "the true value of Btc is zero."

How did you reach that conclusion. Could you take me through your process of thought and the research you based this on?

[chankan]

@Sleepless in Seattle He don’t have any thoughts. Just said like lots of idiots says. Don’t worry about idiots like Martin-Ibk. Dogs barking behind elements

[James Willey]

I'm also involved in bitcoin, but I'm still active in trade besides all this. It isn't hard anything, there is a crypto tracker app https://goodcrypto.app/ that can be done even without a machine for a long time. You just have to have your head on your shoulders to manage the emotion rather than flame out, even seasoned traders make several of these mistakes..

[Rjm13]

anyone betting against bitcoin and eth still just aren’t educated on the facts

[Sarge54]

@Rjm13
You couldn’t be more correct. Paradigm shifts come with great difficulty for many people.

[Martin_ibk]

@Sarge54 that's the talk of people who r invested in Btc. But life on this planet is a little bit more complex. Btc is no real value. That's a fact. It is made up, dreamed up, but not real. It's just a game.

[Rjm13]

@Martin_ibk to today and tomorrow generation it has massive massive value my friend. By your logic the value of a dollar is “made up” not real based off a game that the federal govt is playing and losing

[tiemtheft]

Rest assured bitcoin will never be worth zero, because if it ever dips down low enough I will buy all of it.

[Jethroe1]

@tiemtheft I will beat you to it.

[Rjm13]

@tiemtheft 🤣 you will never get mine precious

[solar_master]

I don't get it. How is this Bitcoin/blockchain thing producing anything? Is this creating something of value? Honestly this seems like a game.

[Jethroe1]

@solar_master Solar, Bitcoin has value as a monetary good because people widely accept it as a store of value, and a medium of exchange,\; the market determines the fair value. You could argue that the market is often wrong, or distorted, and I won't argue with you on that. But Bitcoin has a return of over 200% for 12 years, and three boom and bust cycles that should have ended it's life cycle if it were a bubble or had no value. Instead, it just keeps coming back stronger and stronger. It now has a "flywheel effect" that is scary. I've never seen anything in my life adopted so quickly, or move so fast in market cap.

[solar_master]

@Jethroe1 People widely accept it, or investors hope it's widely accepted?

Once again, what does it produce? What will it replace? A lot of talk about miners and cold storage? What are they and what is that?

Is this an actual product or a video game? $60,000 per share is an awful lot of money for something I can't even figure out.

[JohnFromTheWoods]

@solar_master It's the tulipmania of XXI w. - there's no such thing as a value story into something that does not present tangible value by itself or is backed by something that presents such value ( like the economies of the countries emitting money ).

All it will take is a hard regulators' shake. Once G20 countries say the fun is over, it will plunge like no tomorrow.

[Positive777]

Well done Ariel. Solid coverage as usual.

[Jethroe1]

I was reading the Glassnode data today, and over 4,000 coins have been moved to miner's wallets in just over 2 weeks. Additionally, the data shows without equivocation, a tremendous amount of the previously 4 million liquid Bitcoins available for trading being taken offline. I'm expecting a large movement in price also, Ariel, and I feel the path of least resistance is upward.

[Dale Roberts]

Interesting analysis. Thanks I will follow. I thought the solid consolidation was a very good event. It's acting like a grown up asset, ha.

Dale

[HamishMacEwan]

@Ariel Santos-Alborna wrote: "the New Zealand pension system have all added Bitcoin allocations."

"KiwiSaver is a voluntary savings scheme to help set you up for your retirement."

"Once a person becomes a member of a KiwiSaver scheme, the members' primary relationship is with their scheme provider. "

www.ird.govt.nz/...

"NZ Funds Management’s KiwiSaver growth fund has invested in bitcoin, and chief investment officer James Grigor​ expects that within five years it will feature in more KiwiSaver schemes.

The KiwiSaver provider changed its offer documents in October to allow it to invest in cryptocurrencies for the first time.

Grigor said bitcoin had become a commodity, with many of the attractive hallmarks of gold, which investors often bought as a store of value in times of economic crisis.

“If you are happy to invest in gold, you can’t really discount bitcoin,” Grigor said.""

www.stuff.co.nz/...

[High Yield FIREVestor]

This bitcoin sh*t is so goddam fun, crazy! Man, I'm long that MF coin! I can't believe how fookin rich I'm getting.... we shall let the naysayers keep bashing. Great article, Mr. Author!

BTC 🚀🚀🚀🚀🚀🚀🚀🚀🚀🚀

[AbolishtheFed]

This whole Bitcoin story is absolutely insanely interesting. I’m glad we are alive to witness this. This is some crazy sh#t.

I prefer Etherium and the exchanges at this point, but have owned som bitcoin in the past.

I am still a gold bug.

[lk200]

@AbolishtheFed
I think crazy shit is better stupid shit.
BC stupid shit can be forever....ha ha ha.

[Aaron173]

@AbolishtheFed I like ETH for its first-mover advantage in DeFi and it's solid market position as the #2 crypto, but the gas is a killer for end users and small retail traders. I suspect that ETH is going to eventually lose momentum to upstarts like ADA and DOT unless this issue is sufficiently remedied in the upcoming network revisions.

[N32117]

@Aaron173 I think Ethereum is here to stay as a source of debt money to finance loan contracts. For transactions, the Lightning network is already gaining acceptance and even dominance for small transactions.

[SilverBandit]

@Ariel Santos-Alborna what's your end of year price target?

[Ariel Santos-Alborna]

@SilverBandit Thanks for reading. Here's my conclusion about that from a previous article: "the cycle will likely peak between $88,991 and $279,830. The mean price would be $184,410 by year-end."
seekingalpha.com/...

I don't have a "I will sell some at this price" target. I more so look at several factors (Mayer Multiple, market cap/realized cap, RSI, etc.) with price and will risk-off if I think it's too frothy.

[SilverBandit]

@Ariel Santos-Alborna Thank you for answering my question. We'll see what happens. May the Force be with you.

[Illuminati Investments]

Something that is infinitely devisible can't be supply limited.

[SWinCA]

@Illuminati Investments - Oh dear. That comment is almost scary in its error and ignorance.

[N32117]

@Illuminati Investments I suppose you said this purely in jest. However, there are people with no math education who might think it is true. Adding emoji or ;-) to the end of that post might prevent the ignorant from acting on bad advice.

[amREADY]

@Illuminati Investments We should do business.

[Gadzman_33]

Basically, your taking crap 💩 ie fiat currency, and using it to buy a bigger pile of crap 💩 💩 !! Neither one is actually considered money , only Gold and Silver has that title , the bible tells us this fact about 700 times ! Bitcoin is actually worthless because it's just a bigger fools game , ie nobody is selling it , so how is it used in transactions?? Dumbest thing I've ever seen ! Long precious metals and REAL assets, short air in a bottle!!!

[SWinCA]

@Gadzman_33 Your comment history shows the same nonsense for over 3 years. It must be infuriating to be so passionately wrong for so long.

I loved this comment from 2018 "So the market sells off and Bitcoin is down $350 while Gold goes up $30 , so that kinda tells us what people trust the most !!"

Compare the price of bitcoin to gold since 2018 and using your own logic maybe it is time to revise your thesis.

[SilverBandit]

@SWinCA Like Mike Pachtler has been bearish on netflix for over a decade.

[WillyDogg]

@Gadzman_33 so your go