Get Ready For A Bitcoin Liquidity Crisis

over 3 years ago

Bitcoin is going to be in very scarce supply. This is good for hodlers of the largest cryptocurrency. However, it might not be all roses and sunshine for the prolonged development of the ecosystem.

In short, institutions are buying BTC in bunches. Even Grayscale, after announcing that it is suspending its purchasing as per the rules of its trust, went ahead and bought 12K more. There are now rumors that Tesla, soon to be sitting on $18 billion in cash, will be buying into BTC.

This is leading to the speculation that Bitcoin will moon (or as some are saying, going to Mars). The price, in USD terms, will explode. This will be caused by the fact that there are a few Bitcoin entering the market. Keep in mind, there are only 900 Bitcoin mined each day.

What is really revealing is the big money players on Wall Street are not even involved. With companies such as Square and Microstrategy buying up Bitcoin, the industry was given a jolt in the arm. However, relatively speaking, these are bit players. The real money is in the most conservative of Wall Street institutions, the ones who will enter at a later date. Those companies are sitting on trillions in assets under management.

At that point in time, the fun will really begin.

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It is also the point where Bitcoin maximalists run into trouble. These people view Bitcoin as the answer to everything. That said, it is becoming evident that Bitcoin's role in the future financial framework is changing. No longer can one assume it is going to be a peer-to-peer payment system.

For markets to operate effectively, there needs to be liquidity. This is something that Bitcoin is going to run out of very quickly. As more BTC enters the holdings of major institutions, that much less is available on the open market. Make no mistake, these companies are not buying with the intention of transacting. They have one view in mind: the price of BTC will be higher in the future.

This is a very telling moment for the entire cryptocurrency industry. While all the focus is upon Bitcoin, the reality is this is opening the floodgates for all other projects to shine.

We are not going to be living in a future where one blockchain nor cryptocurrency is all there is. It is not a winner take all scenario. Over the next decade, we are going to see millions of cryptocurrencies developed all over the world.

Even today, we see a report out of Russia detailing how the State Duma is expecting an explosion of cryptocurrency issuance after the first of the year.

Anatoly Aksakov, a member of the Russian State Duma and a key representative of local crypto legislation efforts, said that the Duma’s Committee on Financial Markets expects Russian crypto issuance to surge after the adoption of the country’s new crypto law on Jan. 1, 2020. Passed in July 2020, the law “On Digital Financial Assets” provides legal status to crypto, but bans people from using cryptocurrencies like Bitcoin (BTC) as a payment tool.

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Of course, there are already thousands of cryptocurrencies in existence outside of Bitcoin. Many of these are tied to blockchains that are improving in their capabilities meaning a larger portion of the financial system can be shifted.

Another area that is overlooked is the explosion of NFTs. This is likely to be one of the next major moves as they gain in popularity. The ability to tokenize individual assets cannot be overstated. It will offer instant liquidity to those markets which are traditionally non-liquid, such as real estate.

We will have to see the development in this realm over the next couple of years. Part of the issue is that the platforms simply cannot scale at this time to handle the necessary volume to make a difference.

The present financial system is teetering. We are likely to see more difficult times in the next 12-18 months economically. The Great Reset is underway which is going to cause a lot more upheaval. We already saw hundreds of thousands of small businesses wiped out in 2020. A lot more will follow.

At the same time, we are rapidly moving towards a time when sovereign debt enters the crisis stage. Bond markets are already being nuked as central banks and governments continue to be impotent against the economic collapse that is upcoming.

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Sadly, too many believe the economic "handlers" are able to control the economy. Sure, they can tank it but rebuilding is another matter. This is where they err in their outlook.

As defaults start to rise, this will put pressure on national currencies. It will not be surprising to see a coordinated reset on that end. Expect 4 or 5 central banks to get together and basically reset their currencies, a move that will insulate each other from the markets obliterating them.

Debt forgiveness will also take place. This will hinder the entire financial system as confidence is sucked out. The idea of tossing contract law out the window has enormous ramifications. Lenders will not enter the waters if they have no protection.

Ultimately, we see the door opening for DeFi. As the traditional system is screwed over (screwing itself over?), people will be forced to turn to other means.

Here is where the explosion in value of Bitcoin as well as other cryptocurrencies could enter. With them holding their value, if not gaining, they can serve as the foundation for the lending system. Using the expected trillion of dollars in value of Bitcoin as collateral for lending, platforms could alter the path of our financial system. It is likely we see other cryptocurrencies layered on top of such platforms, thus providing the liquidity required to keep the system flowing. However, beneath it all is the value of Bitcoin which is hodled away, only gaining in value versus some of the other major currencies.

Tens of trillions of dollars of capital formation is being erased on a global scale. This is unprecedented in human history. The destruction of wealth is completely mind boggling. This is something that central banks are likely aware of, hence all the money printing.

Nevertheless, it is a drop in the bucket compared to what is being wiped out. This is a point that the mainstream misses. Central banks already proved they lack the weapons to battle what is taking place. At the same time, politicians showed themselves to be completely obtuse to what is taking place.

In the end, whether it is ignorance, ideology, or a lack of political will, we cannot expect the necessary actions to be taken by the usual suspects. Hence, cryptocurrency is going to have to be the one that steps in and takes over.

This charge is being led by Bitcoin but it is not the only one in the game. The entire industry is going to have to step up.

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