- Keeping Bitcoin on crypto exchanges contributes to market liquidity but also, as BTC liquidity on crypto exchanges decreases, there will be less supply of BTC in the market, which can influence its price increase.
As the cryptocurrency market succumbs to what appears to be a bearish cycle and the price of Bitcoin (BTC) is down 69% compared to its all-time high, we all want to understand what is going on.
First, it is necessary to understand that the market is cyclical, that is, there are trends or patterns that can be identified as a bullish phase and a bearish phase that occur from time to time and the factors that lead to each phase are varied.
However, this particular guide will explain what is the effect that occurs when a person buys Bitcoin as a long-term investment but keeps it in a crypto exchange.
What is Bitcoin?
Bitcoin was designed by Satoshi Nakamoto as an alternative to traditional money. In particular, Bitcoin set out to be the world’s first decentralized cryptocurrency and payment system and, yes, to some extent it succeeded. The point is that, in reality, the usefulness of Bitcoin has changed.
Bitcoin became the flag of all those who noticed the problems of the traditional system. Central banks can print how much money a few decide and thereby significantly affect the quality of life of the majority. An example of this are the financial crises that the world has experienced.
In this way, the concept of Bitcoin for the community began to mutate. Yes, BTC serves as any other currency and, therefore, can be used as a means of payment. However, it certainly does not have all the necessary properties to fulfill this role efficiently.
Consequently, Bitcoin began to gain traction as a store of value, that is, as a refuge from inflation and the consequences of the traditional financial system.
So depending on how a person sees what Bitcoin is, they are going to invest in it and store it in different ways.
If you want to learn more about what Bitcoin is, we invite you to read the guide specially created by Bitcoin Mexico for this purpose.
What determines the price of Bitcoin?
One of the most common questions regarding Bitcoin is: is it really worth it? How is your price determined? Isn’t it exaggerated?
Obviously there are different theories regarding this point, however we will limit ourselves to the economic theory of supply and demand. So, let’s look at each one separately.
- Bitcoin offer: Satoshi Nakamoto specially designed Bitcoin to have a fixed supply of 21 million BTC. New BTC will be created until this limit is reached, but in addition, new BTC is scheduled to be added approximately every 10 minutes. This implies that there is no one in the world that controls the supply of Bitcoin, while the supply of US dollars is controlled by the US Federal Reserve.
By having a fixed and verifiable supply for all, the offer is not necessarily an element that explains why the price goes up or down. However, the available supply of Bitcoin does have a fundamental role in all this and will be explained later.
- Bitcoin demand: The other element that can intervene in the valuation of Bitcoin is its demand. Obviously, if the offer is fixed, a growing demand generates pressure on the price. Now, what affects the demand for Bitcoin? The factors are extremely varied such as general market events, international regulation, what is happening in traditional finance, social networks and many more.
Thenthe price of Bitcoin at any time is a function of the price at which people are willing to buy or sell. However, the question that this guide seeks to answer is: Can keeping Bitcoin in crypto exchanges affect the price? The answer is directly linked to the available supply of Bitcoin.
Bitcoin Offer Available
Crypto exchanges are platforms that allow the buying and selling of cryptocurrencies. Typically, the best known are centralized crypto exchanges (CEXs), such as Binance either coinbasesince they are the ones that allow you to buy Bitcoin using fiduciary currency.
For a platform to allow buying and selling, must have the necessary liquidity to be able to execute said operations practically instantaneously. But how do they obtain such liquidity?
In the case of CEXs, liquidity is generated in the same way that it is done in traditional financial institutions and it is precisely for this reason that they are at the center of the debate.
This implies that CEXs provide liquidity using internal asset reserves or using a liquidity provider such as an external market maker. That is, they use the funds deposited by their clients to provide liquidity and to be able to execute the operations.
In this way, there is an available supply of Bitcoin that is found in crypto exchanges and is used to provide liquidity to the market. This is known as the Exchange Balance And, if the number of cryptocurrencies held by an exchange is high, it means that there is high liquidity to buy and sell.
So, for example, by November 2021, at which point the price of Bitcoin hit $64k USD, there were 2.43 million BTC available on crypto exchanges for people to trade. Currently, according to Coinglass, there are approximately 2.23 million BTC available on crypto exchanges. A reduction in available supply of 8%.
But what does this mean? Well, when the available supply of Bitcoin in crypto exchanges is reduced, it means that bitcoiners are withdrawing their BTC and depositing it in cold wallets, that is, in a kind of vault.
Keep in mind that when BTC is deposited in a cold wallet, investors will not have the ability to quickly sell their holdings in the face of a volatile downside episode, so they would likely be No one would store an asset in a secure vault that is difficult to access unless they plan to keep said asset for the long term.
Thus, When the supply of BTC available on crypto exchanges decreases, it means there is a somewhat bullish sentiment because investors are going long-term on the cryptocurrency.
Should I take my BTC out of crypto exchanges?
Holding Bitcoin on crypto exchanges contributes to market liquidity and consequently allows trades to be generated.
Many bitcoiners believe that as the liquidity of BTC on crypto exchanges decreases, its price will increase basically because this means that the supply would be reducing. Therefore, Holding BTC on crypto exchanges could go some way to contributing to bearish cycles.
However, to assume that the only thing that affects the price of BTC is its liquidity on crypto exchanges would be to ignore a wide variety of factors that are happening now and have happened in other bear cycles for the crypto.
So, should anyone get their BTC out of crypto exchanges? The answer will depend 100% on the person’s strategy against Bitcoin. Do you want to use it as a means of payment? Do you want to speculate in the short term with it? Do you want to trade? It is probably best to keep your BTC on crypto exchanges because they will provide you with the necessary liquidity to meet your goals.
Instead, do you want to invest in Bitcoin for the long term? Are you looking for greater security on your investment? Do you trust Bitcoin as a store of value? Ideally, you would probably want to keep your BTC in a cold wallet.
Even so, individual needs and preferences are infinite and, therefore, there is no way to answer the question in a general way.
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