The Bitcoin market is facing a liquidity crisis triggered by supply and demand imbalance, which is reshaping the landscape of the cryptocurrency ecosystem.
1. Supply and Demand Imbalance: The Core of the Liquidity Crisis
- Surge in Demand: Since 2024, the influx of institutional funds and spot ETFs has driven Bitcoin demand to increase by 432% year-on-year.
- Supply Rigidity: The total supply of Bitcoin is fixed, the issuance speed of new coins is stable, and the lock-up behavior of long-term holders (HODLers) leads to a continuous reduction in circulating supply.
- Intensified Scarcity: Exchange inventories have dropped to multi-year lows, while cold wallet holdings have surged, and the Dormancy index is approaching historical highs, with Bitcoin transitioning from a 'trading asset' to a 'store of value.'
2. Three Major Drivers of the Liquidity Crisis
(1) Fragmentation of Market Structure
- Uneven distribution of liquidity across exchanges, widening price spreads, and extreme price fluctuations on low-liquidity platforms exacerbate overall market instability.
(2) Chain Reactions Triggered by High Volatility
- In July 2025, Bitcoin surged to $120,000 before crashing, with a total liquidation amount of $465 million within 48 hours (involving 120,000 users), and panic selling further drained liquidity.
(3) Regulatory Uncertainty
- Global policy divergence leads to restricted capital flows, and sudden regulatory changes in certain regions may trigger instant liquidity depletion.
3. Impact of the Crisis: Volatility, Costs, and Confidence Shock
- Increased Price Sensitivity: Small transactions can trigger significant volatility, leading to wider bid-ask spreads.
- Rising Transaction Costs: Insufficient liquidity leads to increased slippage and greater execution difficulty.
- Market confidence undermined: Short-term speculative funds withdraw, and the proportion of long-term holders increases, which may suppress market activity.
4. Future Outlook: Crisis or Turning Point?
The liquidity crisis has exposed the insufficient maturity of the Bitcoin market, but it also highlights the value of its anti-dilution characteristics. Possible solutions include:
- Improvement of institutional-level liquidity tools (such as ETF market-making mechanisms);
- Development of cross-exchange liquidity aggregation protocols;
- Clarification of regulatory frameworks to reduce policy arbitrage risks.
Conclusion: The liquidity crisis is a necessary test in the process of Bitcoin becoming a mainstream asset; short-term pain may pave the way for long-term value accumulation. Market participants need to seek a new balance amid volatility, while progress in regulation and infrastructure will be key variables.
