The Bitcoin price story for 2020 was all about a putative liquidity crunch.
The Bitcoin story for 2021 is all about re-evaluating the liquidity crunch in real time.
Since the flight to US dollars at the end of March 2020 and the subsequent massive injection of new US dollars to deal with the effects of a pandemic closed global economy, the number of Bitcoin being withdrawn from circulation and locked up for the longer term has been accelerating. This affects number of Bitcoin readily available to satisfy new demand from intuitions, corporates, money services, and retail investors.
Contrary to popular chatter, the new entrants into Bitcoin in Q4 2020 do not appear to be short term profit hunters, preferring to withdraw the coin and hold too. This is a very positive sign for the Bitcoin price which will be driven higher by more demand locking up more Bitcoin.
Scarcity does not create value but perception of scarcity does have a clear and pervasive effect on price – particularly when total supply is fixed and released at a known rate rather than being optimised for increasing demand.
[Graph from glassnodeinsights: The Week On-Chain (Week1, 2021)].
