Bitcoin Exchange Reserves Plunge to 3-Year Low—Is a Supply Shock Coming?
Digital Asset Market: Bitcoin exchange reserves have dropped to a three-year low of 2.5 million BTC, suggesting a potential supply shock as institutional demand from exchange-traded funds (ETFs) grows. Despite global trade tensions, Bitcoin has remained resilient above $95,000, indicating strong institutional interest and possible seller exhaustion. However, stagnating spot Bitcoin ETF inflows could pressure its price. Maintaining the $95,000 psychological support is crucial to avoid significant downside volatility, as a correction below this level could lead to substantial liquidations of leveraged long positions. Despite short-term correction concerns, Bitcoin's price outlook for 2025 remains optimistic, with projections ranging from $160,000 to above $180,000.
Macro Economics: The European Union, led by European Commission President Ursula von der Leyen, plans to implement retaliatory measures against the United States in response to President Donald Trump's imposition of 25% tariffs on steel and aluminum imports. These tariffs aim to bolster U.S. steel producers by raising the cost of foreign steel, though von der Leyen criticizes them as detrimental to business and consumers. Trump's tariff strategy has also targeted China, Canada, and Mexico, with the latter two seeing a one-month delay in implementation. These escalating trade tensions, also involving China's recent levies on U.S. imports, occur amid ongoing global inflationary pressures, prompting concerns that tariffs might contribute to consumer price hikes. Von der Leyen is set to meet U.S. Vice President JD Vance to discuss these issues.
Equities: US stocks edged lower on Tuesday as investors awaited further developments on President Donald Trump's tariff policies, with particular attention on potential universal tariffs to be announced midweek. Key indices, including the Dow Jones, S&P 500, and Nasdaq, all dropped amid these uncertainties. Trump's recent imposition of a 25% tariff on steel and aluminum imports intensified trade tensions with Canada and Mexico. Investors were concerned about the implications of a trade war on corporate earnings, the global economy, and inflation. As such, attention turned to Federal Reserve Chair Jerome Powell's congressional testimony for insights into monetary policy amidst inflation worries. Concurrently, Coca-Cola saw a rise in stock following strong earnings, while Shopify also recovered after initially forecasting a downbeat profit. Wall Street was also abuzz with news of Elon Musk's failed offer to acquire OpenAI and Meta's layoffs aimed at redirecting focus toward AI talent.
Wall Street faces unexpected challenges under the Trump administration's second term, contrary to earlier optimistic forecasts of an M&A boom and deregulation. The month saw the lowest number of announced M&A deals in the US since 2014, with antitrust regulators blocking a potential merger between Hewlett-Packard and Juniper Networks. Concerns about new tariff plans also created uncertainty around business decisions and borrowing costs. Additionally, high corporate valuations have slowed the pace of dealmaking. Despite the downturn in M&A activity, big bank stocks like JPMorgan Chase, Goldman Sachs, Citigroup, and others have significantly increased, outperforming major stock indexes.
The Fed and US Treasury: Federal Reserve Chair Jerome Powell, in remarks before the Senate Banking Committee, emphasized the Fed's commitment to reducing inflation and indicated no rush to lower interest rates, citing a strong economy and labor market with inflation still above the 2% target. He noted the current policy stance is less restrictive and provides flexibility, warning against adjusting policy too quickly or too slowly to avoid negative impacts on inflation, economic activity, and employment. These comments align with previous statements amid an uncertain fiscal environment influenced by President Trump's tariffs aimed at foreign policy goals. Markets expect the Fed to maintain the current rate, set between 4.25%-4.5%, likely through summer after adjustments in 2024. Powell omitted tariff discussions but may face related questions, as the administration prioritizes lowering the 10-year Treasury yield over immediate rate cuts.
Geopolitical: U.S. President Donald Trump suggested that Ukraine risked losing its sovereignty to Russia and expressed a desire for compensation for U.S. aid provided to Ukraine. Trump mentioned that the U.S. had nearly reached a deal with Ukraine to receive $500 billion worth of rare earth minerals in exchange for continued support, although Ukraine has not publicly confirmed such a deal. President Volodymyr Zelenskyy expressed willingness to negotiate for minerals in exchange for aid, amid concerns over the U.S.’s desire to end the war through a potential deal with Moscow. This comes as Ukraine looks to negotiate peace talks, demanding security guarantees. Meanwhile, Trump's comments are exerting pressure on European allies to increase their support for Ukraine, as the U.S. has contributed $65.9 billion in military aid since Russia's 2022 invasion, with the EU providing 48.3 billion euros. Senior U.S. officials are set to attend high-profile meetings in Europe, urging allies to take more financial responsibility.
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Kentucky has introduced legislation to potentially establish a Bitcoin reserve, becoming the 16th U.S. state to explore such a move. The bill proposed by State Representative Theodore Joseph Roberts would permit the State Investment Commission to allocate up to 10% of excess state reserves into digital assets, specifically those with a market capitalization exceeding $750 billion, averaged over the previous year. Currently, only Bitcoin qualifies, with a $1.9 trillion market cap, while Ether falls short at $330 billion. We believe it is only a matter of time before the U.S. Treasury announces its Bitcoin holdings target, though the timing remains uncertain. Additionally, the decline in Bitcoin holdings on exchanges—from 3.3 million at the end of 2022 to 2.5 million—suggests a depletion of motivated sellers, a key signal of supply tightening.
Last cycle, we saw similar charts (see below) floating around, only for exchanges to state they saw strong net inflows. Regardless of whether exchanges are increasing or decreasing, we are seeing a tightening across the OTC market for orders over 5k BTC.
If you have legitimate sellers looking to transact, contact edwin@1konto.com—we can work on it together.
Financial markets broadly accept that the Federal Reserve will not implement a rate cut in 2025. While inflation remains a focal point, tariff policies are now exerting a more significant influence on price stability than potential adjustments to interest rates. Historically, trade barriers such as tariffs and export restrictions have not necessarily strengthened the imposing nation’s economy but have encouraged resilience in the targeted country. This trend is particularly evident in the U.S.-China tech dispute, where restrictions on chip exports have failed to spur significant domestic semiconductor growth while simultaneously pushing China to accelerate its technological self-sufficiency.
Against this backdrop, Bitcoin’s role as a strategic reserve asset is becoming more pronounced. As economic policies shift towards protectionism and inflationary pressures persist, assets outside traditional monetary policies, like Bitcoin, continue to gain appeal. The structural reduction in Bitcoin supply and increasing institutional interest suggest that state-level adoption efforts, such as Kentucky’s proposed reserve, could begin a broader governmental shift toward digital asset accumulation. If the Treasury follows suit, it would signal a significant milestone in Bitcoin’s integration into sovereign financial strategies.
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