Bitcoin’s Vanishing Act: Is a Supply Shock Coming?

A massive shift is underway deep within the Bitcoin (BTC +1.1%) market.  It’s a quiet, data-driven trend that points toward a future of profound scarcity.  For investors, understanding the mechanics of this shift is no longer optional.  To stay ahead of the curve, it is crucial to understand the potential and reasoning for an increasingly likely Bitcoin supply shock.  So, what are the phases that may result in such an event?

Phase 1: The Mechanics of Scarcity – How the Big Money Moves

To grasp the scale of this event, you must first understand that the world’s largest investors don’t buy Bitcoin like the rest of us.  They operate in a private, high-stakes arena called the Over-the-Counter (OTC) market.

While you might buy $1,000 of Bitcoin on a public exchange like Coinbase, an institution looking to purchase $500 million worth cannot.  Placing an order that large on a public order book would trigger seismic price slippage, costing them millions.  To circumvent this, they go to an OTC desk, which typically functions in two primary ways:

Agency Desks: These act as expert matchmakers.  They connect a large buyer with one or more large sellers from their private network, taking a commission for facilitating the trade.  They don’t use their own funds.

Principal Desks: These use their own capital to fill the order.  They buy and hold large reserves of Bitcoin specifically to sell to clients, taking on market risk in exchange for profit on the “spread” (the difference between their buy and sell price).

For years, cumulative reserves held on public exchanges have been a key source of liquidity for these desks, especially principal desks needing to restock their inventory.  In 2025, however, that wellspring is now beginning to run dry.

Phase 2: The Data Doesn’t Lie – A Quantitative Look at Depletion

It is important to recognize that this isn’t speculation; it’s a trend validated by on-chain data.  Bitcoin is a public and immutable ledger, after all.

• Plummeting Exchange Reserves: As of June 2025, the total Bitcoin held on centralized exchanges has fallen to historic lows.  Recent data from analytics firm CryptoQuant shows reserves have dropped to just over 1.0 million BTC. To put that in perspective, over 550,000 BTC have left exchanges in less than a year.  This mass migration of coins into private, long-term storage (“cold wallets”) is the clearest indicator of a supply squeeze.
• The Rise of “Illiquid Supply”: Glassnode, another leading analytics firm, tracks a metric called “Illiquid Supply.”  This measures the amount of Bitcoin held in wallets that rarely sell, accumulating coins for the long term.  As of May 2025, this metric reached an all-time high of 14 million BTC.  This means a vast majority of Bitcoin is not for sale at current prices and is effectively off the market.
• The ETF Demand Engine: The launch of U.S. spot Bitcoin ETFs in 2024 created a structural demand shock.  On many trading days, these ETFs have collectively purchased 5 to 10 times more Bitcoin than is being newly mined.  With daily mining rewards at only ~450 BTC after the 2024 halving, this creates a massive supply-demand deficit that can only be filled by drawing down the already-dwindling exchange reserves.

Simply put, all of this means that demand is significantly outpacing supply, and typical sources may soon deplete their reserves.  With the increasing adoption of Bitcoin as a treasury reserve asset among publicly traded companies, by nation states, and as digital gold among younger generations of investors, it would also appear as though demand will continue to outpace supply for the foreseeable future.

Phase 3: The Psychology and Precedent – Why Now?

The exodus of Bitcoin from exchanges is driven by a powerful shift in investor psychology and is supported by historical patterns.

First, there are the prevailing mantras involving self-custody with events like the collapse of the FTX exchange serving as a harsh reminder of their relevance: i.e., “not your keys, not your coins.”  Investors, from large institutions to individuals, are increasingly opting for self-custody to eliminate counterparty risk, moving their assets into wallets only they can control.

Then there are the recurring halving Cycles.  Bitcoin’s price action has historically moved in four-year cycles centered around its “halving” events.  The 12-18 months following each past halving (2012, 2016, 2020) have coincided with major bull runs.  The current cycle, supercharged by ETF demand, appears to be following a similar, albeit more aggressive, pattern.

Phase 4: Modeling Scarcity – A Glimpse into the Future

So we can see what is happening to the supply and demand of Bitcoin, and why, but what does this mean looking forward?  While no one truly knows the answer, there are two models often used to help conceptualize Bitcoin’s potential trajectory based on its scarcity:

The Stock-to-Flow (S2F) Model

Popularized by analyst “PlanB,” this model values Bitcoin like a commodity such as gold or silver.  It quantifies scarcity by dividing the total circulating supply (the stock) by the amount of new supply mined annually (the flow).  After each halving, the flow is cut in half, the S2F ratio doubles, and the model predicts a significant price increase to reflect this new, higher level of scarcity.

The Power Law Model

This model, championed by physicist Giovanni Santostasi, observes that Bitcoin’s long-term price growth follows a predictable power-law curve when plotted on a log-log scale. It suggests a more gradual, but powerful, long-term ascent, with predictable peaks and bottoms.  This model points to a potential cycle peak of around $210,000 by January 2026.

While no model is a perfect crystal ball, both converge on the same fundamental conclusion: Bitcoin’s programmed scarcity is a powerful driver of its long-term value.

Phase 5: Risks and Counterarguments – What Could Stop the Shock?

As it stands, a true Bitcoin supply shock appears more likely than ever before.  That, however, does not mean it is a ‘sure thing’.  It is only prudent to recognize the potential factors that could derail BTC from its current path.  Some of these factors that could delay or mitigate such a supply shock include:

• Macroeconomic Downturn: A severe global recession could dampen institutional demand for all assets, including Bitcoin.
• Regulatory Crackdown: Hostile regulations in major economies could stifle adoption and create selling pressure.
• Long-Term Holder Capitulation: While unlikely, a black swan event could trigger panic selling from long-term holders, temporarily flooding the market with supply.
• Profit-Taking: As the price rises, the incentive for miners and long-term holders to take profits increases. A recent report from CEX.IO suggests that this profit-taking could be significant enough to meet rising demand and avert a dramatic shock in the near term.

Things rarely go exactly as expected, which makes it crucial to plan for the worst and hope for the best.

Conclusion: An Unprecedented Trajectory

Between plummeting exchange reserves, record-high illiquid supply, a structural demand-supply deficit created by ETFs, and the historical precedent of halving cycles, an increasingly compelling case can be made that Bitcoin is primed for a massive supply shock.  If true, the upper limit of its price potential is unknown.

While risks remain, the data paints a clear picture of an asset undergoing a profound transition.  The era of easily accessible, liquid Bitcoin is ending.  For investors, this means the coming 12-24 months represent a critical window where the forces of shrinking supply and relentless demand are set to collide in a way the market has never seen before.

To learn more about the excitement behind what makes Bitcoin an intriguing investment, make sure to visit our look at the top 10 reasons to invest.