The Bitcoin market is currently witnessing pivotal changes in its liquidity dynamics. With the illiquid supply reaching an all-time high at 15.3 million BTC, representing approximately 78% of the Bitcoin circulating supply, it suggests a growing pool of holders committed to their long-term Bitcoin investments.
Concurrently, the liquid supply has retraced to 2012 levels at 1.3 million BTC. This decreasing trend implies a potential shift in the market’s operating behavior, with more entities transitioning to longer-term holding strategies, thus joining the ranks of the ‘illiquid entities’.
Furthermore, the highly liquid supply has seen a significant reduction over the past three years, down from 3.7 million BTC in March 2020 to the current 2.9 million BTC. This decline may signify a thinning of active traders or entities that rapidly move Bitcoin.
These liquidity dynamics collectively hint at a constriction of Bitcoin’s active supply. The combination of a growing illiquid supply and shrinking liquid and highly liquid supplies can create a ‘short squeeze’ scenario. This occurs when the market’s limited active supply struggles to satisfy trading demand, potentially triggering sharp upward price movements as traders scramble to cover their short positions.