The first quarter of 2022 was eventful, mainly due to the economic and geopolitical factors that weighed down the cryptocurrency market. However, some of these events also call for a potential shock to Bitcoin’s supply going forward, with this view from analysts such as Lark Davis.
There are some factors at play, factors that can drive strong demand for BTC. Especially since the price action has improved a lot lately.
In fact, one of Davis’ latest tweets noted that countries, cities, banks, hedge funds, sovereign wealth funds, billionaires and corporations are interested in Bitcoin. He believes that this interest will grow rapidly and may cause a shock in Bitcoin’s supply. Such an opinion is also based on the idea that institutions are no longer ignoring the potential of Bitcoin.
Currency outflows give us a good idea of the demand levels that the cryptocurrency has seen in recent months. Most of the outflows have moved to retail wallets, possibly indicating long-term positions. This outflow also coincides with higher inflation levels in major world markets.
Why inflation may be the biggest contributor to the supply shock
Inflation has been the biggest crack in the traditional financial system to date. It is annoyed by economic pressures that have forced the Federal Reserve to print more money during the pandemic in an effort to stimulate the economy. Unfortunately, cleaning up that excess liquidity has become a challenge and emphasizes 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 could increase the demand for Bitcoin and contribute to a supply shock, especially with the dwindling supply on exchanges.
It is worth pointing out that opinions are not unanimous. For example one user suggested that a lack of new investors to absorb the additional supply would likely drive the price down. However, this argument fails to take into account the factors that drive Bitcoin adoption, such as a fixed maximum supply, Bitcoin’s halving, and its deflationary characteristics.
Governments and monetary control
Recent social and political events, such as the standoff between truck drivers and the Canadian government and the war between Russia and Ukraine, have highlighted the dangers of strict government control over money.
These factors strengthen the argument for Bitcoin ownership as censorship-resistant money that offers freedom from government interference. The demand for Bitcoin arising from the aforementioned realization may encourage more institutional and individual Bitcoin adoption.