What Drives Bitcoin Supply and Demand & 7 Top Tools for Analysis

Understanding Bitcoin supply and demand is crucial to making informed decisions as you navigate the unpredictable Bitcoin market. Picture this: You’ve noticed a sharp uptick in Bitcoin’s price. As someone who wants to invest in BTC, you know it would be wise to buy while prices are high to take advantage of the opportunity. But why is Bitcoin’s price increasing? What will happen if you buy in now? Will prices continue to rise, or will they crash? What’s driving this momentum? Could it be a shift in Bitcoin’s supply and demand? If so, what’s behind Bitcoin’s supply and demand changes? You’ll want to answer these types of questions before making a purchase. This article will help you make sense of Bitcoin supply and demand, giving you a comprehensive understanding of the factors influencing Bitcoin’s supply and demand, along with practical tools to analyze market trends and make informed investment decisions effectively.

One way to gain an even deeper understanding of Bitcoin supply and demand is with Bitcoin Magazine Pro’s Bitcoin Analysis. This valuable tool will help you accomplish your goals, such as understanding the factors influencing Bitcoin’s supply and demand and effectively analyzing market trends so you can make informed investment decisions.

Bitcoin’s Price Movement Primarily Influenced By Supply And Demand, Expert Claims

Bitcoin’s price dynamics are unlike those of traditional assets, and they are subject to rapid shifts based on changing market conditions. While Bitcoin has attracted a growing number of investors and users since its inception in 2009, its price remains highly volatile, fluctuating in response to varying levels of market demand. 

What drives these demand shifts? The answer lies in its unique characteristics as a decentralized digital asset, especially the role of supply and demand in its valuation.

The Role of Supply and Demand in Bitcoin’s Valuation

Experts agree that supply and demand primarily influence Bitcoin’s price. Fundamentally, an asset’s supply increases, and if demand remains unchanged, the asset’s price will reduce. Conversely, if an asset’s supply reduces or if demand increases, the asset’s price will rise. In the case of Bitcoin, it has a fixed supply of 21 million coins. As of mid-2023, around 19.4 million Bitcoins have been mined. This limited supply, coupled with changing levels of market demand, drives Bitcoin’s price fluctuations.

Recent Price Movements Show Supply and Demand Dynamics at Work

Following the recent price upswing in Bitcoin, several factors, like crowd sentiment, have been considered the primary reason for the surge. 

Axel Adler Jr., a market expert, has delved into the subject, noting that the recent and previous price spikes are mainly due to supply and demand.

Bitcoin’s Market is Controlled by Supply and Demand Dynamics

According to Santiment, a leading market intelligence platform, the positive sentiment around Bitcoin is witnessing a significant uptick. It has reached a new high point of the year, with investors and traders anticipating the digital asset will soon reach the $70,000 price level. This increase in positive sentiment comes after BTC experienced an over 22% rise in the last three weeks. As a result, enthusiasts and investors are watching the development closely to see how it will impact BTC's price trajectory in the upcoming months. 

Santiment has addressed this heightened anticipation, highlighting that for Bitcoin to reach a new all-time high in the coming months, the asset might have to wait till the crowd’s expectation has cooled down. Furthermore, the intelligence platform noted that there are currently 1.8 positive and negative postings about BTC, signaling strong optimism among investors and market participants. “Markets historically always move in the opposite direction of the crowd’s expectations,” the platform added. 

Supply and Demand vs. Market Sentiment: Diverging Views on Bitcoin’s Price Drivers

While Santiment believes that Bitcoin’s next upward movement may rely on a reduction in crowd-positive sentiment, Axel Adler Jr, an on-chain and macro researcher, argues that the development does not primarily impact BTC’s market. Responding to the post, the researcher has asserted that the fundamentals of supply and demand majorly drive the price movement of BTC rather than the jovial mood generated by the masses. “The main factors that drive the market are always supply and demand,” he stated.

Bitcoin Supply in Profit Shows Healthy Market Activity

In a recent research, analysts at the on-chain data platform CryptoQuant reported that Bitcoin’s profit supply has remained at high levels, which shows that many BTC holders are still making gains. According to CryptoQuant, the profit margin on BTC supply has mostly stayed above 80%, considering past cycles. This persistent maintenance of supply profit significantly indicates whether or not a bull cycle is in motion. 

While there have been several scenarios where the profit has dipped below 80%, CryptoQuant noted that it has stayed above 80% for most cases in the ongoing bull cycle. Meanwhile, the platform has identified them as buying opportunities for those moments that it fell below the percentage.

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How Does Bitcoin Supply and Demand Work?

Understanding Bitcoin’s supply and demand dynamics is crucial for investors looking to predict its price movements. The supply of Bitcoin is fixed at 21 million. This means that no more than 21 million Bitcoins will ever exist. Demand for Bitcoin, on the other hand, fluctuates based on market forces. This is similar to: 

• Stocks
• Commodities
• Other assets

As demand for Bitcoin increases, so too does its price. As more people buy Bitcoin, the available supply on exchanges decreases, impacting the speed at which prices rise.

The Basics of Bitcoin’s Supply Mechanics

To understand the circulating supply of Bitcoin, it is essential to go right back to the beginning. When Bitcoin was launched in 2009, it was created with a fixed supply mechanism. On average, new BTC tokens enter circulation every 10 minutes. As explained later, the block time can vary depending on network conditions. But it has averaged to 10-minute cycles over time. So why does this matter? Every time a new block of transactions is confirmed, the circulating supply increases as more BTC is minted to reward miners. 

Currently, this amounts to 3.125 new Bitcoins for every block. Previously, this stood at 6.25 BTC. And before that, 12.5 BTC, 25 BTC, and 50 BTC, respectively. The supply rate changes due to the ‘Bitcoin halving’. Bitcoin halving happens every 210,000 blocks or about four years. This reduces the supply of new tokens over time. More specifically, the number of new BTC tokens entering the supply every 10 minutes is reduced by 50%. The previous Bitcoin halving took place on block number 840,000 in April 2024. Bitcoin halving provides the BTC ecosystem with clarity, certainty, and predictability since Bitcoin cannot suddenly increase its supply. 

The Bitcoin supply system contrasts traditional currencies, with new money being ‘printed’ at any time. So, considering all of the above, there are over 19.7 million Bitcoins in circulation right now. This amounts to approximately 94% of the total supply. Once the supply hits 100%, 21 million BTC tokens will be in circulation. Based on halving cycles of 210,000 blocks, Bitcoin is expected to reach its maximum supply in 2140.

What Happens When Bitcoin Reaches Its Maximum Supply?

While Bitcoin halving events reduce the supply of new Bitcoins entering circulation over time, what does it mean for Bitcoin when it reaches its maximum supply? Once 21 million Bitcoins have been mined, no new supply will enter the market. Instead, the Bitcoin network will operate on transaction fees. This means that Bitcoin will become a deflationary asset, and the supply will decrease if Bitcoins become lost or unrecoverable.

How Many Bitcoins Are There Left to Mine? 

Considering that 19,722,500 tokens are already in circulation, this leaves 1,277,500 BTC left to mine. Bitcoin mining keeps the network decentralized. One of the many unique features of Bitcoin is decentralization. This means that, unlike traditional currencies, a central bank or government does not control the Bitcoin network.  Moreover, Bitcoin transactions don’t require third-party authorization. This also contrasts traditional currencies, which must go through banks and other intermediaries when transferred. Instead, Bitcoin transactions are verified by blockchain miners. To ensure that Bitcoin is an inclusive financial system, anyone can help mine transactions. The process requires miners to connect hardware to a device. The device will attempt to solve an equation. The equation is so complex that only a specialist device can solve it. It takes about 10 minutes on average for the equation to be solved. 

What Are Bitcoin Mining’s Environmental Impacts?

Mining requires expensive, powerful hardware and consumes a considerable amount of electricity. This is because of the complexity needs to be solved. For example, in 2021, the New York Times reported that Bitcoin mining uses more energy than entire countries. The same article states that the average household would require 9 years of energy supply (or $112,500) to mine a single Bitcoin block. 

Building on that, the Cointelegraph reported that in the first five months of 2024, Bitcoin mining in the US has consumed 20,822.62 GWh of electric power, costing over $2.6 billion at the current average commercial electricity rate. To paint a clearer picture, “this amount of energy could charge every electric vehicle in the U.S. 87.52 times or power 1,983,107 households for a year.” 

How Does Bitcoin’s Supply Affect Its Price? 

Although the Bitcoin mining system is inclusive, it is very competitive. The reason for this is that the miner successfully verified that the block received newly minted Bitcoin. This currently amounts to 3.125 BTC for every mined block. Miners receive $211,680 BTC tokens every 10 minutes based on the current Bitcoin price. This huge incentivization is why Bitcoin miners are prepared to invest so much. 

Only the most powerful Bitcoin mining rigs and those with access to cheap electricity have a realistic chance of success. Although large-scale operations now dominate Bitcoin mining, there are still ways for the average citizen to get involved and mine Bitcoins at home. Cloud mining companies, for example, pool resources from multiple small investors to collectively mine Bitcoin. That said, not only are cloud Bitcoin mining sites highly centralized, but many are scams.

Does Bitcoin Have an Inflation Problem? 

Investors should also understand inflationary controls when asking how many Bitcoins there are. This is a significant concern with traditional currencies. After all, fiat currencies are no longer backed by gold or other valuable assets. Instead, central banks can print as much money as they wish. For example, the US Federal Reserve printed over $3 trillion worth of US dollars in 2020. This was in response to COVID-19 measures and amounted to almost one-fifth of the total supply.

Similarly, in 2020, the Bank of England printed nearly £500 billion throughout the pandemic. The European Central Bank also engaged in ‘money printing’ during the pandemic, amounting to €1.85 trillion. This trend can be found in most corners of the world. So why does this matter, and how does it relate to the Bitcoin supply? Well, ‘currency printing’ increases the money supply and reduces its value. This is because of the impact of inflation, which increases the cost of living. When too much cash enters circulation at any given time, this can have a disastrous effect on the economy. These risks don’t exist in the Bitcoin network. This is because the new supply of Bitcoin tokens entering circulation is fixed. Most importantly, the supply rate is built into the Bitcoin code and cannot be amended. This means that the Bitcoin supply is fixed and consistent.

What Is Bitcoin Halving? 

Just like traditional currencies, Bitcoin experiences inflation. However, as noted above, inflation is fixed and predictable. Inflation arises when new BTC tokens enter circulation. We have established that this happens every time a new block is mined, approximately in 10-minute cycles. Crucially, the amount of new Bitcoin entering circulation is reduced by 50% for every 210,000 blocks mined. This is known as the Bitcoin halving event, occurring approximately every four years. 

• The Bitcoin block reward was 50 BTC. After 210,000 blocks were mined in November 2012, the mining reward was reduced to 25 BTC. 
• In July 2016, after 420,000 blocks, the reward was reduced to 12.5 BTC. 
• In May 2020, after 630,000 blocks were mined, the mining reward was reduced to 6.25 BTC. 
• The most recent Bitcoin halving event occurred in April 2024, on block 840,000. This reduced the mining reward to 3.125 BTC. 
• The next Bitcoin halving is scheduled on block 1,050,000, expected in 2028. It’ll reduce the mining reward to 1.625 BTC. Bitcoin halvings will continue every 210,000 blocks until the total supply reaches 21 million — this is expected to happen in 2140. 

Once the maximum supply is reached, there won’t be any new BTC tokens entering circulation. In other words, Bitcoin will no longer be an inflationary asset.

How Do Bitcoin Halving Events Impact Supply and Demand? 

 

Bitcoin Halving Event

Bitcoin halving is an essential event for investors to keep tabs on. When the Bitcoin mining reward is halved, this slows down the rate of inflation. This is because for each 10-minute block that is mined, 50% fewer tokens enter circulation. 

For example, when the previous Bitcoin halving event occurred in April 2024, the mining reward was reduced from 6.25 BTC to 3.125 BTC. Bitcoin’s price action has historically been linked to halvings. Bitcoin was valued at $9,100 on May 11th, 2020, the date of the Bitcoin halving, when the mining reward was reduced from 12.5 BTC to 6.25 BTC. 

Historical Impact of Bitcoin Halvings

Seventeen months later, Bitcoin peaked at over $68,000 — an increase of over 650%. Similar events took place during the 2016 Bitcoin halving. On July 9th, 2016, Bitcoin was worth $662. Seventeen months later, Bitcoin peaked at a then-all-time high of $20,000. This amounts to post-halving gains of over 2,900%. 

History suggests that demand for Bitcoin increases in response to the halving event. Because less Bitcoin is entering the market, this has resulted in prolonged price appreciation. The last Bitcoin halving took place on April 19, 2024. It remains to be seen if history repeats itself.

Key Figures: How Many Total Bitcoins Are There?

So now that we have explained how the underlying network determines supply, let’s summarize the question: how many Bitcoins are there?

What Other Factors Impact Bitcoin’s Price? 

Fundamental news also has an impact on the demand for Bitcoin. Consider how the markets reacted when the SEC approved Bitcoin ETFs on January 10, 2024: Spot Bitcoin ETFs showed significant inflows and record trading volumes. On February 26, the total trading volume for nine ETFs hit $2.4 billion, surpassing previous records. Institutions and retirement planners started including Bitcoin ETFs in investment funds and 401(k)s; retail investors followed institutional moves. On March 14, the price of Bitcoin hit a new all-time high of $73,750. Another area that can influence the demand for Bitcoin is regulation. For example, if a country bans Bitcoin outright, this could reduce demand on a much broader scale. If a significant economy were to recognize Bitcoin as legal tender, demand would increase significantly.

What Are Unrecoverable Bitcoins? 

The supply of Bitcoin is fixed and immutable; it increases every time a new Bitcoin block is mined. Not all Bitcoins in circulation are accessible. Bitcoins are deemed unrecoverable when A wallet’s password and private keys are lost. Hardware wallets storing Bitcoin are physically damaged. BTC is sent to incorrect or non-existent address results. There are bugs in wallet software or blockchain applications. Paper wallets become inaccessible due to loss or damage. 

Approximately 4 million Bitcoins have been lost from the circulating supply. This reduces the Bitcoin supply from 21 million down to 17 million. An estimated 1 million tokens are held by Satoshi Nakamoto, the creator of Bitcoin. These tokens have remained idle in a wallet since 2010. Many argue that they should no longer be included in the circulating supply.

Do Stolen Bitcoins Impact Bitcoin’s Supply? 

Stolen Bitcoins are usually laundered before being cashed out. However, this is becoming increasingly difficult due to improvements in blockchain forensics. After all, Bitcoin transactions are posted to the public ledger. If stolen Bitcoins are moved from an identified wallet, law enforcement agencies can be notified in real-time. This increases the risk of detection, so criminals will often leave the stolen Bitcoins sitting idle in the wallet. 

Consider the case of the 2011 Mt. Gox hack. It’s one of the largest Bitcoin wallets, with over 80,000 BTC. At the current rate, the wallet contains roughly $5.4 billion. The tokens have remained idle since 2011. Some argue that these 80,000 tokens shouldn’t be included in the circulating supply. Ultimately, the risk of losing or stealing Bitcoins will likely never go away. This is another reason Bitcoin will become a deflationary asset when it reaches the maximum supply. No new tokens will enter the market, while the supply will keep declining with every stolen or lost token.

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7 of the Best Bitcoin Demand Valuation and Analysis Tools

Accurate valuation and analysis tools help investors and analysts track Bitcoin’s demand patterns to make informed decisions. Here, we explore seven of the best Bitcoin analysis tools that offer unique insights into the asset’s market demand.

1. MVRV Z Score: Gauging Bitcoin’s Value 

The MVRV Z-Score uses blockchain analysis to identify periods where Bitcoin is extremely over or undervalued relative to its ‘fair value’. It uses three metrics: 

Market Value 

Otherwise known as total market capitalization, this applies to Bitcoin if you were to multiply the latest available BTC USD trading price on exchanges by the number of bitcoins mined thus far.

Realized Value

Instead of counting all of the mined coins at equal, current price, the UTXOs are aggregated and assigned a price based on the BTC USD market price at the time when said UTXOs last moved. UTXO stands for the unspent output from bitcoin transactions. Each bitcoin transaction begins with coins used to balance the ledger. 

Unspent simply means that the receiving address has yet to use those coins. Realized cap’s effectiveness intuitively seems to adjust for two aspects of BTC’s nature, establishing the collective psychological sum of entries when users began seeing Bitcoin’s value and long-term potential:

• Lost coins
• Coins used for holding 

Z-score

A standard deviation test that pulls out the extremes in the data between market value and realized value.

Due to the larger market cap for Bitcoin, the creators have highlighted we may not hit the upper red band on Bitcoin during market tops, as market cap decreases in volatility. I believe that the upper threshold of MVRV might not prove as reliable — as market cap overextends less and less above realized cap as time progresses. 

MVRV Z-Score Analysis. Identifying Bitcoin Accumulation Zones and Market Cycles

The MVRV Z-Score shows when market value is far below realized value, highlighted by z-score entering the green box. Buying Bitcoin during these periods has historically produced great returns. The Z-Score is currently above the green box, highlighting we are not in the ideal market-cycle accumulation bottom zone.

2. Bitcoin Logarithmic Growth Indicator: Understanding Market Cycles

The Bitcoin Logarithmic Growth Indicator charts Bitcoin on logarithmic scales both price-wise and time-wise. As a result, you can draw one trendline across the tops of each market cycle and another trendline joining the accumulation zones of each market cycle. This indicator has then been adjusted to include Fibonacci levels, showing that price reacts very well to each of the key Fib lines. The log lines on this indicator have been adjusted for TradingView and its limitations as to not being able to provide logarithmic data of the Horizontal Axis.

The accumulation phases of market cycles at the bottom band and the tops of market cycles at the top band can both be gauged using this indicator. Also, there are useful reactions to the different Fibonacci levels which can be used in confluence with other horizontal support and resistance levels. Currently, Bitcoin is sitting within the bottom accumulation zone according to this Indicator.

3. On-Chain Metrics of BTC Addresses with 100 BTC + Balance: Tracking Whales

Bitcoin addresses with 100 BTC or more currently hold a staggering $740,000 at today’s prices. That’s a sum either large players, institutions, or old whales in the system use. Many will use that amount because it’s not visible during transactions and transfers. Using multiple addresses with 100 BTC is a viable solution to try and remain less visible in the ever-watchful eye of the blockchain metric scanning bots and programs. 

How can this on-chain metric be used? You can see it at the end of November 2018. We had a steep drop in BTC addresses to print the BTC top only a few weeks later. August 2018 saw another significant drop in the number of addresses. Even though the price stayed stable for another three months, the next direction was a steep drop in Nov 2018. 

Address Behavior Patterns: Comparing Bitcoin Cycles and Smart Money Movements

The 2019 rise in BTC showed another fascinating pattern. Unlike the beginning of the previous BTC cycle, we replicated the end of the last cycle. In this cycle, the addresses started to decline right after the first impulse, while in the 2015 cycle, we had a significant gain in addresses until about mid-cycle in 2016. 

More than 100 BTC + addresses were reduced as we climbed in price. Near the top, we had another very steep drop: only one week before the topping out of price. At the end of September, the current bottom in 100 BTC + addresses was printed out at 16052. Now it’s for us to see whether we will start to see a rise in this number while the price consolidates or rises or whether the smart money is still exiting this ecosystem.

4. 200 Moving Averages on the Weekly Timeframe: Identifying Momentum

Moving Averages are exceptionally useful tools used to identify momentum and are used by various algorithms as levels of support and resistance. When it comes to Bitcoin, there isn’t a more important one than the 200 MA. The 200 MA on the weekly has marked out the last three bottoms in Bitcoin’s market cycle. It is also significant when price stretches more than 1000% from the MA, it is extended, and that zone has historically been a good place to be selling Bitcoin.

The 200 MA weekly currently stands at 5096. So if we were to judge a floor where price would be met with a lot of demand, we can know there will be decent buy support at 5100 for BTC if price gets there.

5. Bitcoin Spent Output Profit Ratio (SOPR): Assessing Profitability

The SOPR is a straightforward indicator. It’s calculated from spent outputs. It is the realized value (USD) divided by the production's value at creation (USD) or the price sold / price paid. 

When SOPR > 1, the owners of the spent outputs are in profit at the time of the transaction; otherwise, they are at a loss. This graph can be produced by plotting the SOPR of all spent outputs combined and aggregated by the day they were paid. 

The SOPR oscillates around number one. During a bull market, an SOPR below one is rejected, and an SOPR above one is dismissed during a bear market. Therefore, the SOPR oscillator is a reliable marker for identifying local tops and bottoms. According to the SOPR analysis, it's moving between a sideways red period and a bear market as the SOPR is starting to get rejected by one level.

6. Net Unrealized Profit/Loss: Understanding Market Sentiment

Net Unrealized Profit/Loss is the difference between Relative Unrealized Profit and Relative Unrealized Loss. It reflects how much Bitcoin’s circulating supply is at a profit or loss at any given point.

We hit a market top each time the Unrealized Profit/Loss difference goes above 75. The best time to buy is when the difference becomes damaging (i.e. the Relative Unrealized Loss > Relative Unrealized Profit). The indicator is color-coded, with red being the best time to buy and blue being the time to sell. We currently stand at .21, which is neither the best time to buy or to sell. The movement of price would define directionality from here. The indicator suggests we are close to a point of value but not exactly there. 

7. Stock to Flow Model: Assessing Scarcity 

The Stock-to-Flow model is the most famous and followed model in this list. Bitcoin is the first-ever scarce digital object. A limited number of coins exist, and it will take a lot of electricity and computing effort to mine the three million outstanding coins that are still to be mined; therefore, the supply rate is consistently low.

Stock-to-flow ratios evaluate the current stock of a commodity (the total amount currently available) against the flow of new production (the amount mined that specific year). For store-of-value (SoV) commodities like gold, platinum, or silver, a high ratio indicates that they are mostly not consumed in industrial applications. Instead, the majority are stored as a monetary hedge, thus driving up the stock-to-flow ratio.

Evaluating Bitcoin's Stock-to-Flow Model: Insights, Projections, and Limitations

A higher ratio indicates that the commodity is increasingly scarce and, therefore, more valuable as a store of value. The above chart overlaps the price on top of the stock-to-flow ratio line. We can see that the price has continued to follow the stock-to-flow of Bitcoin over time. The theory suggests that we can project where the price may go by observing the projected stock-to-flow line, which can be calculated as we know the approximate mining schedule of future Bitcoin mining.

The only significant drawback of this model is that it predicts symmetrical gains. In contrast, we already know that gains are always asymmetrical and diminishing in Bitcoin’s life cycle and any other asset. So, it is essential to note that this has not been taken into consideration.

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