Bitcoin Predicted to Face ETF-Induced Liquidity Crisis in Six Months

Crypto could be facing a rocky road soon as an ETF-induced Bitcoin liquidity crisis could be just around the corner and crypto miners might face huge electricity taxes.

The analysis by Ki Young Ju, the CEO of CryptoQuant, suggests a potential Bitcoin supply crunch leading to a sell-side liquidity crisis could be a mere six months away, driven by massive institutional inflows into U.S.-based spot Bitcoin ETFs. With ETFs absorbing huge amounts of BTC and the demand potentially outstripping supply, a price shock could very likely happen.

Meanwhile, the U.S. President proposed a 30% electricity tax on crypto miners to take effect after December of 2024. In contrast, Thailand is starting to open up to crypto as it now allows institutional and high-net-worth investors to invest in spot Bitcoin ETFs.

The Looming Bitcoin Liquidity Crisis

In a recent analysis, Ki Young Ju, the founder and CEO of the on-chain analytics platform CryptoQuant, brought attention to a potential supply crunch for Bitcoin (BTC) that could lead to a sell-side liquidity crisis by September. This prediction is based on the current trajectory of institutional inflows into the crypto market, especially through United States-based spot Bitcoin exchange-traded funds (ETFs), which have seen unprecedented success, holding nearly $30 billion. This makes it the most successful ETF launch in history.

The continued influx of institutional investments into Bitcoin is creating a scenario where the demand might soon outstrip the available supply. Young Ju points out that with ETFs alone absorbing more than 30,000 BTC last week and with known entities like exchanges and miners holding around 3 million BTC—of which 1.5 million is by US entities—the potential for a supply-induced price shock is becoming increasingly likely. He believes that the bearish market players will not have a winning chance until the inflow into spot Bitcoin ETFs ceases.

Despite the bullish outlook for Bitcoin due to ETF demand, the Grayscale Bitcoin Trust (GBTC) has faced some challenges with daily outflows reaching up to $500 million. However, due to the rise in Bitcoin prices since the ETF launch in January, the dollar value of GBTC's reduced Bitcoin holdings has not seen a too large decline, according to WhalePanda.

According to Young Ju, “once a sell-side liquidity crisis happens, its next cyclical top may exceed our expectations due to limited sell-side liquidity and thin orderbook.” It is worth noting that Young Ju pointed out that the BTC held by accumulation addresses—wallets that have only seen inbound transactions— would need to double before the anticipated liquidity crisis fully sets in.

30% Electricity Tax for Crypto Miners

It is clear that the near future might not look too rosy for the crypto space. In fact, President Joe Biden reintroduced a proposal for a 30% tax on electricity used by crypto miners in his 2025 budget proposal. The proposal plans to extend the tax framework to include digital asset mining activities, which are currently not specifically covered under existing tax laws, except for broker and cash transaction reporting requirements.

According to a document from the U.S. Department of the Treasury, the tax would apply to any firm using computing resources for mining digital assets, based on the costs of the electricity consumed, whether owned or leased.

The administration suggests a phased introduction of the tax, starting at 10% in the first year, escalating to 20% in the second, and reaching 30% in the third year. This policy is set to be effective for taxable years after Dec. 31 of 2024. Crypto mining companies will be required to report the amount and type of electricity they consume. For those buying electricity externally or leasing computational capacity, the value of the electricity used will constitute the tax base.

The proposed tax also extends to firms generating their own electricity, including those using renewable sources like solar or wind power. They would face a 30% tax on the estimated costs of their electricity usage.

Critics, like Pierre Rochard of Riot Platforms, argue that this tax is an attempt to suppress Bitcoin and pave the way for a central bank digital currency (CBDC). U.S. Senator Cynthia Lummis has also shared her doubts, suggesting that while the proposal indicates recognition of the crypto industry's size and power, such a tax could severely undermine its development in the United States.

This is not Biden's first attempt to implement this tax. A similar proposal was made in the 2024 budget proposal.

Spot Bitcoin ETFs Enter Thailand's Investment Scene

Meanwhile, Thailand also wants its slice of the Bitcoin ETF pie. Thailand's Securities and Exchange Commission (SEC) has revised its rules to allow the creation of private funds that can invest in spot Bitcoin exchange-traded funds (ETFs) available on United States exchanges.

However, only institutional investors and ultra-high-net-worth individuals will be able to invest in these funds, according to the Bangkok Post. This change comes after a time when asset management firms' investment regulations did not encompass digital asset ETFs. With the United States securities regulator's approval of spot Bitcoin ETFs in January, these ETF shares are now classified as securities rather than crypto assets under Thai regulations, paving the way for their inclusion.

SEC secretary-general Pornanong Budsaratragoon pointed out that due to the high-risk nature of Bitcoin exchange-traded products (ETPs), access would be limited to accredited investors only. Despite the liberalization for institutional and high-net-worth investors, retail investors are still excluded from directly accessing spot Bitcoin ETFs

The government previously prohibited the use of digital assets for payments in March of 2022 and banned cryptocurrencies for lending and investments in July of 2023. Nevertheless, the SEC relaxed some restrictions in January, allowing retail investors to buy digital tokens backed by real assets.