Bitcoin whales seen as potential sellers are disrupting the crypto market

(Bloomberg) — Bitcoin (BTC-USD) trailed traditional assets in August as the month drew to a close, hampered by declining liquidity and lingering concerns that governments could sell off their cryptocurrency holdings.

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The US, China, UK and Ukraine are potential sources of such divestitures, as are lenders receiving tokens from digital asset exchange Mt. Gox, which collapsed, research firm Kaiko wrote in a note. According to the analysis, this is part of a possible $33 billion oversupply of Bitcoin.

Kaiko estimated that the US government holds about 203,220 Bitcoins, followed by China’s 190,000, the UK’s 61,200 and Ukraine’s 46,350. Governments are confiscating tokens in criminal cases, while Ukraine is believed to have received donations to fund its defense against a Russian invasion. Meanwhile, Mt. Gox still has about 46,170 tokens to distribute, Kaiko said.

“Supply exploitation has been a topic in crypto markets throughout the summer,” said Kaiko analysts Adam Morgan McCarthy and Dessislava Aubert. There are several “prominent holders that could be potential sources of selling pressure in the coming months,” they added.

Declining liquidity

Fears of strong sell orders come alongside a drop in liquidity in the Bitcoin market, which can amplify price swings in response to large trades. The digital asset has fallen about 8 percent so far this month against that backdrop, compared with gains of about 2 percent in global equity and bond valuations.

“Bitcoin spot market volumes remain subdued, contributing to recent choppy price action,” Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors LLC, wrote in a note. Seasonal trends suggest that activity typically picks up after the US Labor Day holiday on Monday, he added.

One of the metrics highlighted by Farrell is the seven-day average of Bitcoin’s turnover – trading volume divided by the token’s market value – which fell to 2% after peaking at nearly 5% around the asset’s all-time high digital from March.

Bitcoin struggled in August despite net flows into US spot Bitcoin exchange-traded funds and rising expectations that the Federal Reserve will loosen monetary policy in the coming weeks.

ETF background

The trading environment has also become more challenging in the U.S. Bitcoin ETF sector, according to JPMorgan Chase & Co. strategists. This is based in part on a measure known as the Hui-Heubel ratio, which aims to provide information about liquidity by measuring the number of trades required to move prices.

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“It is surprising that this measure has deteriorated for all spot-Bitcoin ETFs since March, indicating an overall deterioration in spot-Bitcoin ETF liquidity over the past six months,” said the JPMorgan team, including Nikolaos Panigirtzoglou.

Combined daily trading volume for U.S. Bitcoin ETFs fell to less than $2 billion from a peak of more than $10 billion in March, according to data compiled by Bloomberg.

Bitcoin was little changed at $59,535 at 8:34 a.m. in London on Friday, about $14,000 below its March peak. Tokens like Ether and Solana have been shuffled.

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