Just 5% Of All Bitcoins In Circulation Have Traded In The Past Year

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by Tyler Durden
Tuesday, Jul 13, 2021 - 01:40 AM

In JPMorgan's latest weekly bitcoin hit piece (because for some "inexplicable" reason, JPMorgan executive have instructed most of the bank's strategists, including those covering equity and rates, to slam the cryptocurrency on a weekly if not daily basis while the bank quietly builds out its own proprietary crypto fund, almost as if it is desperate to scare its clients into selling), the bank makes an interesting argument: bitcoin is not liquid enough to be successfully implemented as a legal tender in El Salvador.

We won't speak to the validity of JPM's argument - we will soon find out first hand whether or not El Salvador made a mistake in adopting bitcoin as legal tender - although it certainly is simple enough: “daily payment activity in El Salvador would represent ~4% of recent on-chain transaction volume and more than 1% of the total value of tokens which have been transferred between wallets in the past year,” the report said, with the illiquidity and nature of the volume “potentially a significant limitation on its potential as a medium of exchange.”

Perhaps, then again in its brief history bitcoin has certainly demonstrated that it is remarkably scalable and viable even without a central bank propping it up every time there is even a modest risk-flaring hiccup, which is much more than we could ever say about the global stock market or currencies such as Europe's "whatever it takes" euro.

Of course, JPMorgan - a bank that directly benefited form more than one multibilion bailout - will be the last to admit just how much sustainable the cryptocurrency has become, which is why we will ignore the bank's latest round of propaganda, but will point out an interesting fact unearthed by JPMorgan: it goes straight to the heart of the recurring argument why bitcoin is so volatile.

The reason, as JPM has discovered, is that bitcoin's float may be as little as 5%, if not less. Discussing the daily trading volumes of bitcoin, JPM notes that a large fraction of Bitcoin are locked up in illiquid entities (liquidity sinks), "with more than 90% not changing hands in more than a year" while roughly 80% - and rising - are held by wallets with light turnover.  This means that a paltry 5-10% of all bitcoin in circulation has traded in the past year.

Another way of putting it: an asset with a $600 billion market cap has a float of just $30 billion. Which is remarkable as it means that no whales sold bitcoin when it hit its all time high of $65,000. And if they didn't sell then, they certainly won't sell now when it's half that price.

This, more than anything else, explains why bitcoin - an asset whose market cap was more than a $1 trillion as recently as April - is so extremely volatile: with the vast majority of bitcoin locked up or held by whale accounts who rarely if ever trade, the marginal price setter of bitcoin are odd lots - a burst of trading in fractions of a bitcoin, where the momentum in many cases is ignited and magnified by HFTs who then shape the movement of the crypto in hopes of hitting the max pain stop loss positions for other cryptos, and where as a result of such a unique trading environment, the price of bitcoin can swing 10%, 15% , or even 20% or more every day.

The question we have is during liquidation pukes like the one observed recently, how much of the newly released bitcoin are gobbled up by existing or new whales. Judging by the gray line in the chart above, the answer is a record amount.

Which means that we are now in the "weak hands" shake out and whale accumulation phase. And once the new generation of whales has bought enough, that's when the next squeeze higher will take place, sending the crypto currency and its peers to fresh all time highs. Because if there is one thing that is very easy to do with an asset whose float is as low as bitcoin's, it is to manipulate it as a handful of big players want.