In previous articles, we initiated an analysis on the topics of “Global Exchange BTC Liquidity is Decreasing” and “The Liquidity Battle in the Crypto Market in 2025.” As of May, it has become evident that the competition for liquidity has intensified. Ultimately, the surge in the number of Bitcoin holdings by institutional investors over the past year has led to a depletion of liquidity.

Do you remember yesterday’s article titled “New Hampshire’s Strategic Bitcoin Reserve Bill”: A Comprehensive Analysis”? New Hampshire has also joined the competition for BTC liquidity.

Recent data suggests that over 8% of Bitcoin’s total circulating supply is now held by governments and institutional investors. This unprecedented level of sovereign and institutional involvement in a decentralized asset has sparked intense debate: is this the legitimization of Bitcoin as a strategic reserve asset, or does it foreshadow centralization risks that threaten the very ethos of crypto?

For many governments and institutions, the accumulation of Bitcoin reflects a rational strategy in the face of macroeconomic uncertainty. As fiat currencies face inflationary pressures, and geopolitical instability persists, Bitcoin is increasingly being viewed as a digital alternative to gold.

1. Diversification of Reserves:Several central banks and sovereign wealth funds have begun reallocating portions of their portfolios from fiat and gold into digital assets. Bitcoin, with its capped supply of 21 million coins, presents a hedge against inflation that fiat-backed assets cannot offer. Nations with weak currencies or fragile monetary policy regimes, such as Argentina or Turkey, have found particular interest in BTC as a reserve diversification tool.

2. Institutional Legitimization:When pension funds, hedge funds, and public corporations allocate even a small fraction of their portfolios to Bitcoin, it signals confidence to other market participants. High-profile allocations by institutions like BlackRock, Fidelity, and sovereign wealth funds have had a legitimizing effect on the asset class. Bitcoin is no longer just for speculative retail traders; it has found a home in boardrooms and government treasuries.

3. Strategic Autonomy and Sanction Resistance:In an increasingly fragmented global financial order, Bitcoin provides states with a means to bypass traditional payment rails dominated by the U.S. dollar and SWIFT system. For sanctioned nations or those wishing to reduce dependence on Western-dominated financial infrastructure, holding Bitcoin offers a form of financial sovereignty.

4. Inflation Hedge in Practice:Countries experiencing high inflation are now considering Bitcoin as a functional hedge. For instance, Nigeria and Venezuela’s growing Bitcoin reserves are often motivated by a need to preserve value amidst fiat devaluation. These practical uses further legitimize Bitcoin’s narrative as “digital gold.”

While institutional and government adoption brings legitimacy and liquidity, the fact that over 8% of the total Bitcoin supply is concentrated in large hands raises concerns about the long-term health of the network.

1. Erosion of Decentralization:Bitcoin’s founding ethos is built on decentralization and democratization of finance. The aggregation of holdings in the hands of a few large players — whether they be governments or corporations — threatens this ideal. If a small number of entities control a significant portion of the supply, it opens up the network to collusion risks, manipulation, or coordinated sell-offs that could destabilize the market.

2. Impact on Liquidity:Large holders often keep their Bitcoin in cold storage or in long-term custody arrangements, meaning these coins are effectively removed from circulating supply. As more BTC is held for strategic purposes and not transacted regularly, the available liquid supply shrinks. This can lead to heightened price volatility, as even small buying or selling pressure in the remaining float can swing prices dramatically.

3. Market Distortion and Moral Hazard:Governments buying and holding Bitcoin could inadvertently influence market sentiment and pricing. Should a major government announce a sudden sale or policy change, it could trigger panic in the broader market. Moreover, such power could be used as a policy lever, contradicting Bitcoin’s promise of being independent of political manipulation.

4. Custodial Risks and Governance Influence:When institutions hold Bitcoin through custodians, the decentralized nature of the network is partially undermined. These custodians may be subject to political pressure, legal obligations, or even central bank influence. This could lead to pseudo-centralization where the control of Bitcoin, while not on-chain, becomes concentrated in a few centralized institutions.

5. The Specter of Sovereign Confiscation:History shows that states can and do confiscate assets. The more governments hold Bitcoin, the greater the risk that regulatory frameworks may shift towards tight control or even forced custody transfer, especially during financial crises. The case of gold confiscation in the U.S. in 1933 provides a historical parallel that cannot be ignored.

To ensure the continued resilience of Bitcoin as a decentralized asset, the community must remain vigilant. Here are a few mitigation strategies and future directions:

1. Encouraging Retail Participation: Broader retail adoption can counterbalance the influence of large holders. Educational efforts and easier access tools are essential.

2. Transparency in Holdings: Public disclosure of BTC holdings by institutions and governments may help increase accountability and reduce fears of manipulation.

3. Strengthening Non-Custodial Infrastructure: The community should invest in technologies that allow even large holders to secure their assets in decentralized ways (e.g., multisig, distributed custody).

4. Policy Safeguards: Policymakers embracing Bitcoin should also support regulatory frameworks that preserve decentralization and financial autonomy.

Despite the accelerating institutionalization of Bitcoin, it is important to note that over 85% of Bitcoin’s supply is still held by non-institutional investors, with retail investors remaining the dominant force. This means that even though large amounts of BTC are locked in cold wallets by ETFs or corporate treasuries, the decentralized nature of the market has not been fundamentally shaken. Some have raised concerns that, with so many Bitcoins being “dormant” or custodially held, the reference value of on-chain data may be diminishing. This concern is not without merit, but it is also not a new one.

Looking back, Bitcoin’s primary trading activities have always been concentrated off-chain, especially on centralized platforms such as Coinbase, Binance, and the early FTX. While these trades are difficult to detect on-chain, they have had a significant impact on market prices and structure. The situation we face today is similar, but the analytical tools we rely on have become much more sophisticated. The flow of ETF funds, as well as changes in corporate and national holdings, often require compliance with information disclosure obligations, which, in turn, provides market analysts with more traceable and transparent data than traditional exchanges.

Overall, institutional interest in Bitcoin has reached unprecedented levels. From ETFs and corporate treasuries to national reserves, the total amount of Bitcoin held by institutions has surpassed 2.2 million BTC, and it continues to rise. Undoubtedly, this influx of funds has injected significant stability into the market during bear markets. However, beneath the stability lies a hidden concern: Bitcoin is gradually becoming financialized, and its price fluctuations are increasingly influenced by macroeconomic sentiment and its correlation with traditional financial assets. This connection is reshaping the original myth of Bitcoin’s independence.

The fact that over 8% of Bitcoin is now in the hands of governments and institutions is a double-edged sword. On one hand, it marks a historic legitimization of crypto as a reserve-worthy asset. On the other, it introduces centralization pressures that could undermine Bitcoin’s foundational principles.

In previous articles, we initiated an analysis on the topics of “Global Exchange BTC Liquidity is Decreasing” and “The Liquidity Battle in the Crypto Market in 2025.” As of May, it has become evident that the competition for liquidity has intensified. Ultimately, the surge in the number of Bitcoin holdings by institutional investors over the past year has led to a depletion of liquidity.

Do you remember yesterday’s article titled “New Hampshire’s Strategic Bitcoin Reserve Bill”: A Comprehensive Analysis”? New Hampshire has also joined the competition for BTC liquidity.

Recent data suggests that over 8% of Bitcoin’s total circulating supply is now held by governments and institutional investors. This unprecedented level of sovereign and institutional involvement in a decentralized asset has sparked intense debate: is this the legitimization of Bitcoin as a strategic reserve asset, or does it foreshadow centralization risks that threaten the very ethos of crypto?

For many governments and institutions, the accumulation of Bitcoin reflects a rational strategy in the face of macroeconomic uncertainty. As fiat currencies face inflationary pressures, and geopolitical instability persists, Bitcoin is increasingly being viewed as a digital alternative to gold.

1. Diversification of Reserves:Several central banks and sovereign wealth funds have begun reallocating portions of their portfolios from fiat and gold into digital assets. Bitcoin, with its capped supply of 21 million coins, presents a hedge against inflation that fiat-backed assets cannot offer. Nations with weak currencies or fragile monetary policy regimes, such as Argentina or Turkey, have found particular interest in BTC as a reserve diversification tool.

2. Institutional Legitimization:When pension funds, hedge funds, and public corporations allocate even a small fraction of their portfolios to Bitcoin, it signals confidence to other market participants. High-profile allocations by institutions like BlackRock, Fidelity, and sovereign wealth funds have had a legitimizing effect on the asset class. Bitcoin is no longer just for speculative retail traders; it has found a home in boardrooms and government treasuries.

3. Strategic Autonomy and Sanction Resistance:In an increasingly fragmented global financial order, Bitcoin provides states with a means to bypass traditional payment rails dominated by the U.S. dollar and SWIFT system. For sanctioned nations or those wishing to reduce dependence on Western-dominated financial infrastructure, holding Bitcoin offers a form of financial sovereignty.

4. Inflation Hedge in Practice:Countries experiencing high inflation are now considering Bitcoin as a functional hedge. For instance, Nigeria and Venezuela’s growing Bitcoin reserves are often motivated by a need to preserve value amidst fiat devaluation. These practical uses further legitimize Bitcoin’s narrative as “digital gold.”

While institutional and government adoption brings legitimacy and liquidity, the fact that over 8% of the total Bitcoin supply is concentrated in large hands raises concerns about the long-term health of the network.

1. Erosion of Decentralization:Bitcoin’s founding ethos is built on decentralization and democratization of finance. The aggregation of holdings in the hands of a few large players — whether they be governments or corporations — threatens this ideal. If a small number of entities control a significant portion of the supply, it opens up the network to collusion risks, manipulation, or coordinated sell-offs that could destabilize the market.

2. Impact on Liquidity:Large holders often keep their Bitcoin in cold storage or in long-term custody arrangements, meaning these coins are effectively removed from circulating supply. As more BTC is held for strategic purposes and not transacted regularly, the available liquid supply shrinks. This can lead to heightened price volatility, as even small buying or selling pressure in the remaining float can swing prices dramatically.

3. Market Distortion and Moral Hazard:Governments buying and holding Bitcoin could inadvertently influence market sentiment and pricing. Should a major government announce a sudden sale or policy change, it could trigger panic in the broader market. Moreover, such power could be used as a policy lever, contradicting Bitcoin’s promise of being independent of political manipulation.

4. Custodial Risks and Governance Influence:When institutions hold Bitcoin through custodians, the decentralized nature of the network is partially undermined. These custodians may be subject to political pressure, legal obligations, or even central bank influence. This could lead to pseudo-centralization where the control of Bitcoin, while not on-chain, becomes concentrated in a few centralized institutions.

5. The Specter of Sovereign Confiscation:History shows that states can and do confiscate assets. The more governments hold Bitcoin, the greater the risk that regulatory frameworks may shift towards tight control or even forced custody transfer, especially during financial crises. The case of gold confiscation in the U.S. in 1933 provides a historical parallel that cannot be ignored.

To ensure the continued resilience of Bitcoin as a decentralized asset, the community must remain vigilant. Here are a few mitigation strategies and future directions:

1. Encouraging Retail Participation: Broader retail adoption can counterbalance the influence of large holders. Educational efforts and easier access tools are essential.

2. Transparency in Holdings: Public disclosure of BTC holdings by institutions and governments may help increase accountability and reduce fears of manipulation.

3. Strengthening Non-Custodial Infrastructure: The community should invest in technologies that allow even large holders to secure their assets in decentralized ways (e.g., multisig, distributed custody).

4. Policy Safeguards: Policymakers embracing Bitcoin should also support regulatory frameworks that preserve decentralization and financial autonomy.

Despite the accelerating institutionalization of Bitcoin, it is important to note that over 85% of Bitcoin’s supply is still held by non-institutional investors, with retail investors remaining the dominant force. This means that even though large amounts of BTC are locked in cold wallets by ETFs or corporate treasuries, the decentralized nature of the market has not been fundamentally shaken. Some have raised concerns that, with so many Bitcoins being “dormant” or custodially held, the reference value of on-chain data may be diminishing. This concern is not without merit, but it is also not a new one.

Looking back, Bitcoin’s primary trading activities have always been concentrated off-chain, especially on centralized platforms such as Coinbase, Binance, and the early FTX. While these trades are difficult to detect on-chain, they have had a significant impact on market prices and structure. The situation we face today is similar, but the analytical tools we rely on have become much more sophisticated. The flow of ETF funds, as well as changes in corporate and national holdings, often require compliance with information disclosure obligations, which, in turn, provides market analysts with more traceable and transparent data than traditional exchanges.

Overall, institutional interest in Bitcoin has reached unprecedented levels. From ETFs and corporate treasuries to national reserves, the total amount of Bitcoin held by institutions has surpassed 2.2 million BTC, and it continues to rise. Undoubtedly, this influx of funds has injected significant stability into the market during bear markets. However, beneath the stability lies a hidden concern: Bitcoin is gradually becoming financialized, and its price fluctuations are increasingly influenced by macroeconomic sentiment and its correlation with traditional financial assets. This connection is reshaping the original myth of Bitcoin’s independence.

The fact that over 8% of Bitcoin is now in the hands of governments and institutions is a double-edged sword. On one hand, it marks a historic legitimization of crypto as a reserve-worthy asset. On the other, it introduces centralization pressures that could undermine Bitcoin’s foundational principles.