Are Coins Becoming Scarce?

Bitcoin exchange reserves have been dwindling since mid-2022, and new ETFs may accelerate this trend. Should we expect a reserve scarcity and much higher prices?

Bitcoin ETFs Matter

Spot Bitcoin ETFs have been a disappointment so far, attracting net inflows of just $1.5 billion in the 15 days ending on February 1. According to Bloomberg analysts’ calculations, new Bitcoin ETFs added $7.3 billion, while Grayscale Bitcoin Trust lost $5.8 billion.

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Bitcoin ETF Flows

Bitcoin ETF Flows
Source: Bloomberg

$1.5 billion inflow is small compared to Bitcoin's market cap, currently about $840 billion. This inflow represents less than 0.2% of the Bitcoin market cap, seemingly insignificant enough to not affect market dynamics. Despite this, the supply of Bitcoin at exchanges has started to decline, as shown in the year-to-date chart of Bitcoin reserves at exchanges.

Bitcoin Reserves at Exchanges (Year-To-Date Chart)

Bitcoin Reserves at Exchanges (Year-To-Date Chart)
Source: Coinglass

The long-term chart further illustrates that coins at exchanges are becoming increasingly scarce. Contrary to popular belief about a negative correlation between exchange reserves and price, over a 3-year interval, there is no apparent relationship; the price is roughly the same as it was 3 years ago, even though reserves are significantly lower.

Bitcoin Reserves at Exchanges (3-Year Chart)

Bitcoin Reserves at Exchanges (3-Year Chart)
Source: CryptoQuant

Market Cap vs Free Float

The modest ETF inflows, juxtaposed with dwindling exchange reserves, suggest the necessity of a different metric for measuring the total Bitcoin supply. In the stock market, flows are usually measured against the free float rather than the total market cap. However, estimating Bitcoin's free float is challenging. Most Bitcoin holders remain anonymous, and the largest publicly known holders possess less than 20% of the total market cap, making accurate measurement difficult.

Largest Holders of Bitcoin (As of August 2023)


BTC held (in thousands)

% of market cap

Satoshi Nakamoto

1 100


Grayscale Bitcoin Trust

















Robinhood Markets



US government



Winklevoss twins



Source: River Financial

There are compelling reasons to believe that Bitcoin's free float may be significantly smaller than its market cap. Firstly, many known holders have a long-term investment horizon and are unlikely to sell their coins at any reasonable price, especially considering Bitcoin's meteoric rise since its inception. These long-term holders have likely already secured profits to their satisfaction. Additionally, exchanges maintain a portion of cryptocurrencies to facilitate trading, further reducing the free float available for new investments.

Secondly, Bitcoin is often viewed as 'digital gold' by many, particularly by unknown holders who prefer to hold their positions for extended periods, using it as a hedge rather than for short-term gains. This long-term view means that even significant price increases, such as 30%, are unlikely to trigger a sell-off among these holders.

Thirdly, a considerable number of coins are presumed lost, which further diminishes the free float.

Moreover, when considering Bitcoin's market cap in the context of the global population, it appears relatively small. Bitcoin's relevance seems most pronounced in mid-income countries with low credit ratings and/or capital controls, where traditional financial systems offer limited stability or growth opportunities. Residents of wealthy countries may view cryptocurrency primarily as a speculative investment, while those in poorer countries often lack the financial resources to invest. For instance, if 20% of the population in just the four largest countries within this demographic were to invest $1,000 each in Bitcoin, treating it as digital gold, this could represent 40% of all Bitcoins at the current price, highlighting the significant potential for market impact."

Selected Mid-Income Countries With Low Credit Ratings And/or Capital Controls


Total population (million)

GDP per capita, IMF estimate (USD thousand)











1 410



1 688

Source: IMF, Wikipedia

New ETF Inflows?

If inflows into new ETFs continue, they will further drain exchange reserves, potentially making the reserves scarce and inflating the price. Bitcoin halving expected in April will limit coin supply too.

Inflows into Bitcoin ETFs may continue picking up as some large investors and advisers consider adding Bitcoin. That takes some and so inflows may rise all this year. “Securing Gary Gensler’s ETF approval was just the first step toward bringing crypto investing to the masses. Now people like Rob Pettman at LPL Financial — a gatekeeper of more than a trillion dollars in capital — need to be convinced that the new spot-Bitcoin exchange-traded funds are worthy additions to their massive trading platforms… “We just want to see how they work in the markets,” he said. After the three-month assessment, the platform will decide which funds they want to offer, or whether they need more time to assess the ETFs. Like many gatekeepers in the money-management world, Pettman faces a balancing act between keeping his clients shielded from dodgy investments and allowing them to reap the rewards of an emerging asset class,” – reported Bloomberg in the article dated February 3.

To be fair, I personally do not see a case for strategic, long-term investing in Bitcoin ETFs (only a short-term gambling on it). Bitcoin’s greatest advantage is an independence from traditional finance, and so buying it via traditional finance infrastructure looks a bit strange.

The independence from traditional finance has a great value for residents of high-risk countries, which have low credit quality (like many African countries) or are occupied by rogue regimes (like Russia). For investors at US exchanges (where Bitcoin ETFs are traded) this independence has almost no value as traditional finance in the US is extremely safe, and even if someone doubts it, he would buy Bitcoin directly rather than via ETFs. Generally, I believe that residents of most countries with high credit ratings do not need crypto at all (except for gambling on it), because their domestic banks are reasonably safe and a state guarantee for deposits is virtually risk-free. A probability of complete crypto rejection and Bitcoin going to zero is way higher than credit risks of most high-rated financial systems.


Bitcoin's free float is likely much smaller than its market cap, which limits potential supply. In my view, shrinking exchange reserves reflect this. This situation is a powerful long-term bullish factor for Bitcoin.

In the short term, if inflows into new ETFs accelerate, this could further reduce the reserves and inflate prices. However, such a scenario seems like a remote possibility because new ETF inflows are small compared to the reserves. So far, net inflows have been just around 2% of reserves.

Ethereum appears to be a better candidate to bet on for its scarcity in the short term since its supply is constrained by staking and level 2 applications, while spot ETFs are likely to be introduced (possibly in May).

However, amidst all the discussion about limited supply and bullish long-term trends, I would also like to present a concerning chart. Historically, the launches of new, large exchange-traded products linked to Bitcoin have almost perfectly coincided with mid-term market tops.

Bitcoin (BTC/USD)

Bitcoin (BTC/USD) Chart
Source: TradingView

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