Bitcoin Faces Supply Shock Concerns as Exchange Reserves Drop

Bitcoin Faces Renewed Supply Shock Concerns

by Faruk Imamovic
Bitcoin Faces Supply Shock Concerns as Exchange Reserves Drop
© Getty Images/Chirs McGrath

As Bitcoin begins a new week, the cryptocurrency community is buzzing with discussions about potential supply shocks. Exchange reserves are at a seven-year low, and BTC price action is nearing critical resistance levels. These developments are setting the stage for what could be a pivotal moment for Bitcoin.

BTC Price Action Nears Crucial Resistance

Bitcoin, ticker symbol BTC, has started the week strongly, inching back towards the $67,000 mark as traditional financial markets also show signs of activity. The largest cryptocurrency by market capitalization is eyeing a rematch with its historical resistance levels of $69,000 and $73,800. Whether Bitcoin can break through these barriers in the coming days is the primary concern for market participants.

Several factors might contribute to a bullish continuation. Notably, traders are closely watching the United States economic policy as the Federal Reserve prepares to release minutes from its recent meeting. Additionally, U.S. unemployment data is expected to provide further market cues.

There is a growing sense of optimism among traders that Bitcoin has found a local bottom after two months of consolidation. This sentiment is bolstered by a divergence where prices are climbing, yet market sentiment remains subdued compared to the peak levels observed in March. This scenario suggests a potentially more sustainable path towards price discovery.

Data indicates that Bitcoin experienced a brief dip during the weekly close, influenced by geopolitical uncertainties from Iran. However, BTC/USD managed to hold onto its 10% gains for May, quickly rebounding. Monitoring resources like CoinGlass show that significant resistance lies just below $68,000, a critical level for Bitcoin to surpass.

Prominent market participants are expressing positive sentiments. Crypto Damus, a well-known trader, highlighted the recent BTC weekly close as a bullish signal. "Beauty of a BTC weekly close. First Bullish engulfing weekly since October 2023," he remarked, referencing last week's candle that reversed previous losses.

Michaël van de Poppe, CEO of MNTrading, also conveyed optimism about Bitcoin's future movements. He anticipates that Bitcoin will continue to range, with slow upward movements towards the all-time high. Van de Poppe expects altcoins to outperform during this phase, predicting a gradual acceleration towards a significant move in the latter half of the year.

Despite these bullish perspectives, not all analysts agree. Credible Crypto, another influential trader, believes that Bitcoin could still drop to $60,000 or lower before resuming its upward trajectory.

Bitcoin© Getty Images

U.S. Economic Policy and Bitcoin

The macroeconomic environment is set to play a crucial role in Bitcoin's near-term performance. This week, the spotlight is on the Federal Reserve, with several senior officials scheduled to speak. Although Chair Jerome Powell is not among them, the market will scrutinize the language used by other officials for hints on future policy directions.

Minutes from the Federal Open Market Committee's May meeting, which discussed interest rates, are due to be released on May 22. Additionally, U.S. jobless claims data could introduce volatility into the markets, continuing a trend seen in previous weeks.

There is increasing focus on favorable liquidity conditions in the U.S. and globally. Financial commentator Tedtalksmacro recently suggested that the crypto bull run is far from over, citing early signs of a new liquidity cycle and ample room for easing liquidity conditions. He pointed out that while liquidity has returned to crypto, the inflow's velocity has not yet reached the manic phase typically seen at market cycle tops.

One of the significant drivers of this renewed liquidity is the interest in Bitcoin exchange-traded funds (ETFs). After a period of stagnation, these ETFs are seeing a resurgence in demand. Last week, inflows approached $1 billion, marking the best weekly performance since Bitcoin's all-time highs in March.

Tedtalksmacro noted that the ETF demand is happening in a new landscape where Bitcoin's block subsidy has halved, meaning ETF providers need to purchase more BTC than what is currently being added to the supply by miners. This dynamic is creating a supply-demand imbalance that could drive prices higher. "Bitcoin ETFs have purchased 21,700 BTC ($1.5B) in the month to date," Thomas Fahrer, CEO of Apollo, a crypto reviews portal, revealed. This amount is three times the new supply generated by miners.

U.S. spot ETFs now hold approximately 2.8% of the total BTC supply, underscoring their growing influence in the market.

Exchange Reserves Hit Multi-Year Lows

In terms of demand for Bitcoin, exchange reserves offer a compelling indicator. Recent data shows that the amount of Bitcoin available for purchase on major trading platforms is at its lowest since 2017. According to CryptoQuant, exchange reserves were at 1,918,417 BTC as of May 19, down by around 400,000 BTC from the previous year.

This significant drop in exchange reserves aligns with the increasing demand from Bitcoin ETFs. "Right on time for a second wave of ETF Flows," commented Thomas Fahrer, noting the combination of a demand shock and an inelastic supply. In 2021, during the peak of the bull market, approximately 2.7 million Bitcoins were held in exchange reserves with prices around $69,000. Now, with reserves down to about 2 million BTC and prices nearing historical highs, the supply dynamics have shifted considerably.

The recent halving event has further reduced the potential new supply from miners, making it challenging for new Bitcoin to enter the market through sales. Given these dynamics, maintaining a bearish stance on Bitcoin is becoming increasingly difficult.