ZUBR

Retail Investors Steady in Physical Bitcoin Snatch-Up

29 June 2020

This year saw Bitcoin enter its next reward era. This means that the new market supply rate has been cut in half to only 6.25 Bitcoins every block - an event that occurs approximately every 10 minutes. With 90% of all Bitcoins already mined, the remaining supply is estimated to take nearly 120 years to come to market. This figure – the remaining 10% taking another 120 years - shows just how scarce the cryptocurrency already.

Liquidity is likely to be burdened by derivatives that can fill market demand gaps as physical Bitcoins become harder to come by. And most recent market activity due to the coronavirus that interrupted the supply chain of gold can give a glimpse of what potential scenarios might play out in the future for Bitcoin.

Zubr looks at the supply dynamics, retail and institutional demand of the world’s largest cryptocurrency, and how derivatives and spot trading could face contango during times of market stress as Bitcoin looks to displace gold as the global store-of-value.

While many have become well aware of Bitcoin’s limited supply, the dynamics and numbers are always good to be restated, not for effect, but context when assessing the supply and demand nature of a true store-of-value asset class which the cryptocurrency is gunning to be.

When Bitcoin’s first block was solved, what is known as the ‘Genesis Block,’ the miner (the unknown Satoshi Nakamoto) was rewarded with 50 Bitcoins. The creator of the cryptocurrency designed the inflation rate to emulate the new supply of gold coming to the market. As such, every four years, the new Bitcoins that are minted after every solved block and rewarded to miners for their equipment investment and energy use decreases by half. That is until twenty-one million Bitcoins are created, at which point there will be no longer any new supply.

Twenty-one million may sound a lot. But when one begins breaking down the numbers as of our current point in time, the picture becomes a lot clearer as to why Bitcoin enthusiasts are very true to their holding and never selling nature.

Before this decade is over, only 225 Bitcoins will be minted per day and enter the market as fresh supply.  In comparison to the start of this year - when 1800 Bitcoins where being created per day - this means a near 90% loss in new supply – within the next eight years alone.

For those who believe in the cryptocurrency’s attributes as being a store-of-value, this supply squeeze is indeed a big deal. And there is data - if not proving - at the very least pointing out that Bitcoin isn’t only a speculative investment even among retail and smaller investors.

Data provided to Zubr by Chainalysis, the blockchain, and market analytics firm, shows that there is a true intrinsic belief in retail holding Bitcoin for the long-haul.

Looking at the data through an investor's lens, the data obtained from Chainalysis was to see whether or not there is a growth in addresses that could be viewed to be as intentional holdings by rounding up the number of Bitcoins being stored on-chain. The dataset shows that there is continuous growth in purposeful bitcoin investment holdings regardless of price, month on month, year-on-year.

At the start of June 2020, over 215k addresses/entities had rounded Bitcoins (1, 2 up to 10). These addresses have only become to grow more. For example, despite global markets tumbling and along with it Bitcoin's price, these precise rounded addresses have grown by 11% since the start of the year and have yet to see a single month in decline. These addresses that fall within the category of rounded stored Bitcoins haven't seen a single negative month since April 2019.

Total Number of Entities Holding Precise Number of Bitcoins (1 up to 10)(Source: Chainalysis)

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In fact, since genesis, the number of Bitcoin's held in these addresses have only gone down a total of five times month-on-month.

Month-on-Month Bitcoin Increase/Decrease in Precise Addresses (1 up to 10)(Source: Chainalysis)

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In April 2020, addresses holding exactly 1,2,3 all the way up to 10 Bitcoins, had surpassed 500,000. These addresses have been growing every month since the start of the 2018 bear market after the price of Bitcoin hit its peak with the exception of a single month (see chart). The value of these on-chain holdings at the start of June 2020 breached the $5bn mark for the third time ever (see chart).

A fair argument to make as of today is that these addresses and total Bitcoin held only account for 2.5% of the total circulating supply. With that being said, however, the annual average growth rate year-on-year for these specific addresses alone has increased at a steady 1 to 1.5% since 2014.

Extrapolating future demand at this pace points to a very dramatic shift in 2028 when Bitcoin’s supply rate further decreases and these retail size addresses begin to eat up all the new supply alone (see chart). By the time the next reward era comes around in 2024, retail could potentially account for eating up over 50% of the physical supply.

Total Number of Bitcoins Held in Precise Number Addresses (1 up to 10) (Source: Chainalysis)

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Monthly Growth Rate of Bitcoins Held in Precise Number Addresses (1 up to 10) (Source: Chainalysis, Zubr Calc.)

JavaScript chart by amCharts 3.21.152018AprJulOct2019AprJulOct2020Apr-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0JS chart by amCharts

Bitcoin Retail Demand Estimates versus Supply (Source: Chainalysis, Zubr Calc.)

JavaScript chart by amCharts 3.21.15Daily DemandDaily Demand Estimate*Daily Supply
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USD Value of Bitcoin Holdings in Addresses From Exactly 1 up to 10 (Start of Every Month) (Source: Chainalysis, Coinmetrics Pricing)

JavaScript chart by amCharts 3.21.152018Jul2019Jul202001bn2bn3bn4bn5bn6bnJS chart by amCharts

There are two main points in which this data does not account for in the total assessment of retail investment. Firstly, the dataset was a purposeful exercise to see how investors are interacting on-chain with a rounded figure. This means that imprecise balances (i.e. 2.4432 BTC) are not part of the total sums shown. Retail holdings, then, are a lot larger.

The second point is that this data does not show the Bitcoins that are being held on exchanges by investors.

Ethos Intact

Although Bitcoin remains in its infancy in comparison to gold and equities markets, the data shows that the cryptocurrency believers have stayed true to their belief in it as a real store-of-value despite its infamous price fluctuations.

As Bitcoins are trackable – at the very least in terms of address holdings – it will be essential to continue looking for trends in where the supply is going. With the supply limits are known, new Bitcoins through the mining reward might become fully absorbed by retail investors unless price heavily weighs-in over the coming years. (This would also mean that the bands assessed in this research shift down to addresses with 0.1, 0.2 Bitcoins, and so forth.)

While assessing the real value price of Bitcoin has been a difficult task with some looking at mining or network usage, what is proving to be factual is that retail holders continue to add more Bitcoin.

Can Bitcoin Really Displace Gold?

The question of whether Bitcoin is a better version of gold or not is one that each investor will likely have to weigh when looking at a potential store-of-value. One of the first and main attributes that made gold such a valuable commodity was its limited supply. It's also, as previously mentioned, an attribute that Bitcoin is designed to mimic in electronic format.

But it seems that where technology has aided Bitcoin in remaining truly limited in supply, it has done the opposite for gold. According to data from the World Gold Council, a new quantity of gold has been increasing year-on-year as miners become more efficient (see chart). In 2019, gold production had risen by 11% over 2010.

Meanwhile, unlike what has been witnessed with Bitcoin so far, demand has moved in decline for gold further extending that gap available on the market (see chart).

Gold production: Is it really scare when new market supply keeps increasing? (Source: gold.org)

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Meanwhile, gold demand keeps declining Year-on-Year further increasing the supply/demand gap (Source: gold.org)

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“For retail consumers, the [gold] shortages mean higher premiums to buy the metal as well as longer delivery times. The delays have reduced gold’s appeal to potential buyers”

Everett Millman, Florida-based Gold Supplier Gainesville Coins (via FT)

Coronavirus: A Look into Future Dynamics?

No doubt, Bitcoin saw strong demand in the wake of the coronavirus pandemic. The demand was similarly witnessed for gold.

But gold faced problems on global markets as supply interruptions weighed-in on prices. In fact, the price dislocation was so noticeable that markets began trading in contango (where spot prices are lower than future prices due to delivery expectations costing more).

Spreads that are usually only a few US Dollars of separation between London's spot market and COMEX gold futures rose by 700%. To add further to the price pressures, spot market buy and sell spreads rose nearly an eye-watering 10,000% on some trading platforms from $0.5 to $50, according to Reuters.

Production supply disruptions are unlikely to be a problem with Bitcoin being an electronically transferable commodity. But physical Bitcoin supply-constraints could have the same effect regardless and in turn, as seen with gold, push prices further higher.

There is a very critical difference to gold, however. Bitcoin supply constraints will not be a result caused by black swan events (such as the global COVID-19 lockdown that shut-in mines), but the permanent perpetual nature of the store-of-value cryptocurrency that is designed to cut off new supply.

And with retail gunning hard, these supply constraints might come sooner rather than later should growth in demand from smaller investors remain as steady as it has in the past half-decade.

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