The first quarter of 2022 was eventful, especially due to the economic and geo-political factors that heavily suppressed the cryptocurrency market. However, some of these events also make a case for a potential Bitcoin supply shock up ahead, with this opinion held by analysts like Lark Davis.
There are some factors at play, factors that can fuel strong demand for BTC. Especially since its price action has improved significantly of late.
In fact, one of Davis’s latest tweets noted that countries, cities, banks, hedge funds, sovereign funds, billionaires and corporations are interested in Bitcoin. He believes that this interest will grow rapidly and potentially trigger a Bitcoin supply shock. Such an opinion is also based on the notion that institutions are no longer ignoring Bitcoin’s potential.
Exchange outflows give us a healthy view of the demand levels the cryptocurrency has seen over the last few months. Most of the outflows have been moving to private wallets, potentially indicating long-term positions. These outflows also coincide with the higher inflation levels in key global markets.
Why inflation might be the biggest contributor to the supply shock
Inflation has so far been the biggest crack in the traditional finance system. It has been exasperated by economic pressures which forced the Federal Reserve to print more money during the pandemic in an attempt to stimulate the economy. Unfortunately, mopping up that excess liquidity has become a challenge and highlights the need for sound money that is immune to inflation.
Bitcoin presents itself as an alternative that individuals and institutions can use to overcome inflation. Such views can fuel more Bitcoin demand and contribute to a supply shock, especially with the dwindling supply on exchanges.
It’s worth pointing out that opinions aren’t unanimous. For instance, one user suggested that a lack of new investors to absorb the additional supply would likely crash the price. However, this argument fails to take into account the factors pushing Bitcoin adoption such as fixed maximum supply, Bitcoin halving, and its deflationary characteristics.
Governments and monetary control
Recent social and political events such as the stand-off between truckers and the Canadian government and the Russia-Ukraine war have highlighted the dangers of strict government control over money.
These factors strengthen the case for Bitcoin ownership as censorship-resistant money that offers freedom from government interference. The demand for Bitcoin stemming from the aforementioned realization may encourage more institutional and individual Bitcoin adoption.