Bitcoin liquidity over 2021: Supply is on a decreased trend

The circulating supply of Bitcoin has decreased towards the end of 2021, with December marking the lowest month on average that Bitcoin supply has seen in years.

According to a report just released from CryptoRank, the amount of Bitcoin in circulation has been decreasing since the halving in 2020, with availability to buy Bitcoin on exchanges taking a dip. However, towards the second half of 2020 (in October), Bitcoin supply on exchanges accounted for 9.5% of the total supply of Bitcoin. In July 2021, this figure had dropped to 7.3% of all Bitcoin on wallet exchanges and in December, it had fallen still to see only 6.3% of Bitcoin supply accounted for on exchange wallets. At 1.3 million Bitcoin, we can see that Bitcoin’s decreasing supply in circulation is sticking to a downward trend since the halving.

On which exchanges is Bitcoin mainly held?

According to CryptoRank’s data, the exchanges where Bitcoin is being held is unsurprisingly dominated by the leading global crypto platforms. It’s interesting to see, however, that Coinbase, which remains the leading cryptocurrency exhange in terms of total Bitcoin held on its wallets, has lost some of its dominance over the year. Coinbase used to account for just over 50% of the Bitcoin on wallets, but has since dropped to 44.2% according to CryptoRank. Binance has nearly 25% of Bitcoin on exhanges held on its exchange and Bitfinex stands on the bottom tier of the podium with 14.6% of exhange-held Bitcoin on its exhange.

Bitcoin liquidity

As Bitcoin price has risen over the past year, the liquidity of Bitcoin has continued to decrease. As it stands, more Bitcoin is being invested, rather than traded, and locked into offline (or cold) storage compared to how much Bitcoin is being mined. After the Bitcoin halving, where the reward for mining Bitcoin is sliced by 50%, it makes sense that there has been a reduction in the volume of Bitcoin produced. This, hand-in-hand with more Bitcoin being locked away, is a major component in the decrease of Bitcoin’s circulating supply and Bitcoin becoming less liquid.

Additionally, Bitcoin might experience even less liquidity as some investors choose to hold their Bitcoin on exhanges (rather than moving them to cold storage) even though they might not be trading.

Cold storage vs hot storage when Bitcoin is illiquid

While many investors choose to keep their Bitcoin on exchanges – an online practice (refered to as hot storage) – there is a risk that handing over the keys to your Bitcoin to an exchange or third-party might leave room for an attack or a hack. If Bitcoin is stored in cold storage or a combination of hot and cold storage, security measures are in place to protect against a hack as much as possible. Despite this, crypto exchange Binance CEO Changpeng “CZ” Zhao, has suggested that storing keys on an exchange might offer more assurance of safety.

Many hardcore crypto ogs advocate storing your own keys. But the truth is, today most people are not able to secure a key even from themselves (losing it). A trusted centralized exchange is #SAFUer for most people. The numbers speak for themselves.

Need to work on wallets. https://t.co/bsX3Ea5WCD

— CZ 🔶 Binance (@cz_binance) January 19, 2020

As Bitcoin supply and availability decreases, making sure one’s cryptocurrency is safe and secure is imperative.