Shrinking Bitcoin Liquidity and Ethereum’s Pectra Upgrade: Setting the Stage for Crypto’s Next Bull Run

Main Points:

• Bitcoin’s Liquid Supply Has Fallen by 30%
• Over 1 Million BTC Removed from Exchanges Since Late 2023
• ETF Inflows and Institutional Adoption Are Tightening Supply
• Government-Level Bitcoin Reserve Initiatives Accelerate Potential Demand Shocks
• Historical Precedents Suggest Supply Contraction Precedes Bull Markets
• Ethereum’s Pectra Upgrade Introduces 11 Major EIPs Focused on UX, Staking, and Layer-2 Efficiency
• Post-Pectra Metrics: Ethereum Fees Tripled and Network Revenue Increased Fivefold
• Layer-2 Rollup Costs Declined Significantly, Enhancing Ethereum’s Competitiveness

Introduction

Over the past 18 months, Sygnum Bank’s June 2025 Monthly Investment Outlook highlighted a dramatic contraction in Bitcoin’s liquid supply—approximately a 30% decline equating to over 1 million BTC withdrawn from exchanges. As ETFs, corporate treasuries, and even governments begin aggressively acquiring Bitcoin, liquidity on exchanges has thinned markedly, setting the stage for potential demand shock-driven price surges. Meanwhile, Ethereum’s consensus and execution layers underwent the landmark “Pectra” upgrade on May 7, 2025, introducing 11 Ethereum Improvement Proposals (EIPs) to enhance user experience, optimize staking, and drastically improve Layer-2 integration. Post-Pectra data indicates that Ethereum’s network fees have tripled and network revenue has quintupled, while Layer-2 rollups enjoy a 51% reduction in daily blob costs. Together, these developments provide a compelling narrative: a supply squeeze on Bitcoin, combined with fundamental improvements in Ethereum’s scalability and fee structures, may lay the groundwork for the crypto market’s next major uptrend.

Bitcoin’s Liquid Supply Contracts by 30%

Sygnum Bank reports that Bitcoin’s liquid supply has declined by roughly 30% over the past 18 months—a contraction driven primarily by institutional and government‐level accumulation of coins.

• ETF Inflows as the “Marginal Buyer”: Spot Bitcoin ETFs have become the dominant marginal purchasers, driving outflows that have removed over 1 million BTC from exchange order books since late 2023. On June XX, 2025 alone, daily ETF inflows totaled $375 million, led by funds such as ARKB and FBTC, underscoring the growing institutional appetite for direct Bitcoin exposure within regulated structures.
• Exchange Withdrawals Accelerating: Trading platforms have seen a steady decline in on‐exchange BTC balances, dropping from approximately 3.3 million BTC in early 2024 to roughly 2.3 million BTC by mid-2025. This decline represents a 30% drop in liquid supply, heightening the potential for demand shocks when buyer interest spikes.
• Corporate Treasuries and Long-Term Holders: Beyond ETFs, corporate treasuries and long-term holders have contributed to the outflows. Companies issuing equity or debt to purchase BTC have increasingly hoarded coins in cold storage, further constricting the daily tradable float.

The net result is a markedly thinner pool of BTC available for trading. As demand continues to rise—driven by both retail and institutional participants—any sizable inflows could trigger outsized upside price movements.

Potential for Demand Shocks and Price Upside

Historical analysis demonstrates that when Bitcoin’s liquid supply tightens significantly, even moderate inflows can catalyze strong rallies. During previous bull cycles—in late 2020 and early 2021—supply constraints at exchanges coincided with rapid price appreciation from approximately $10,000 to $60,000 within six months. Sygnum’s outlook suggests the current 30% supply contraction could similarly prime the market for large‐scale price shocks.

• Supply vs. Demand Dynamics: With fewer coins readily available, buying pressure—whether from ETF inflows, corporate acquisitions, or government reserves—will chase a shrinking float. Each $1 million of new demand may impact market capitalization by as much as $20–$30 million, per Sygnum’s research head, Katalin Tischhauser.
• Safe-Haven Demand Amid Macro Uncertainty: Bitcoin’s appeal as a hedge against U.S. Treasury volatility and a weakening dollar has grown. In May 2025, turmoil in the U.S. Treasury market—driven by rising interest rates and fiscal deficits—coincided with a 3% rally in BTC amid significant outflows from equities and bonds into digital assets.
• Institutional Demand Remains Resilient: Since April 2025, Bitcoin ETFs have experienced only four days of net outflows, indicating sustained institutional conviction. Funds like Grayscale Bitcoin Trust (GBTC) and Fidelity’s Zero Fee Bitcoin ETF (FBTC) have consistently purchased large blocks, further draining exchange supply.

Given these dynamics, even a modest uptick in buying could precipitate substantial price appreciation. Traders and investors should monitor on‐chain exchange balances and ETF inflow rates as leading indicators of an impending supply shock.

Government-Level Bitcoin Reserve Initiatives

Sygnum’s report also highlights that governments and public institutions are exploring Bitcoin as a reserve asset, a trend that could further accelerate demand and amplify supply constraints.

• New Hampshire’s Legislative Move: In May 2025, the state of New Hampshire passed a bill allowing its treasurer’s office to allocate a portion of state funds into digital assets—including Bitcoin—for inclusion in the state’s reserves. This made New Hampshire the first U.S. state to formally consider cryptocurrency as part of its official treasury management.
• Pakistan’s Strategic Bitcoin Reserve: Reports indicate that the Pakistan government, via its national crypto council, is planning to establish a strategic Bitcoin reserve fund. Although the timeline remains tentative, the announcement alone has fueled speculation of government‐level hoarding and further supply tightening.
• Texas Contemplating Bitcoin Reserves: Shortly after New Hampshire’s move, Texas legislators introduced a bill permitting the Texas Permanent School Fund to hold up to 5% of its assets in Bitcoin and other highly liquid digital assets. While still under debate, passage could mark the first instance of a U.S. state endorsing Bitcoin at the sovereign reserve level.
• Global Outlook on Central Bank Crypto Adoption: Beyond the U.S., several emerging economies—such as El Salvador, which adopted BTC as legal tender in 2021—are studying the macroeconomic implications of Bitcoin as a store of value. In Latin America and Africa, where currency devaluation risk is high, policymakers view digital assets as a partial hedge, potentially prompting further reserve allocations. Although no central bank has publicly disclosed a significant BTC reserve plan as of early June 2025, continued dialogue suggests the trend may accelerate in H2 2025.

Should sovereign entities begin accumulating Bitcoin in earnest, the incremental demand could strain the already thin exchange supply, catalyzing large‐scale price spikes. This “network-driven demand” may prove more resilient than speculative flows from retail traders.

Bitcoin Market Context (June 2025)

As of the first week of June 2025, Bitcoin trades near $105,000, up roughly 15% YTD despite broader crypto market underperformance against equities. Several macro factors underpin its performance:

• U.S. Treasury Market Volatility: In late May 2025, long-term Treasury yields spiked above 4.5%, spurring concerns about sustained rate hikes. Institutional allocators rotated into Bitcoin as a non-correlated asset, contributing to a 10% rally between May 20 and May 31, 2025.
• Weakening U.S. Dollar Index (DXY): The DXY declined by 3% from late April to late May 2025, driven by dovish Fed signals and higher inflation prints. As the dollar weakened, Bitcoin’s correlation to the greenback inverted, reinforcing its safe-haven narrative and bolstering demand.
• Halving Anticipation: The next Bitcoin halving, expected in April 2028, remains three years away. However, on-chain analysts note that miners’ coin inventories are at historic lows due to sustained sales by only 10% of miners, indicating that the market is effectively pricing in future scarcity. With issuance halved every four years, current supply constraints may amplify as HODLer accumulation intensifies.

Taken together, macroeconomic and on-chain signals point toward an environment ripe for Bitcoin appreciation. The convergence of supply contraction, safe-haven demand, and nascent government reserve interest suggests that BTC could test new all-time highs by late 2025 if demand persists.

Understanding Ethereum’s Pectra Upgrade

Ethereum’s Pectra upgrade, activated on May 7, 2025, represents one of the most comprehensive changes since The Merge in 2022. Pectra comprises two coordinated hard forks—“Prague” on the execution layer and “Electra” on the consensus layer—and includes 11 major Ethereum Improvement Proposals (EIPs). Collectively, these upgrades aim to:

1. Enhance Staking Efficiency: EIP-7251 raises the validator limit from 32 ETH to 2,048 ETH, enabling institutional staking providers to consolidate nodes under a single validator endpoint. This reduces node overhead by decreasing the number of validators required for large stakers, driving down operational costs.
2. Advance Account Abstraction: EIP-7702 introduces smart contract capabilities to externally owned accounts (EOAs), empowering wallets with programmable functionality—such as paying gas fees in stablecoins, sponsoring gas payments, and native wallet recovery mechanisms—thus making the network more user-friendly and secure.
3. Boost Layer-2 Integration: Several EIPs (e.g., EIP-4844 “Proto-Danksharding”) expand blob capacity to double the amount of data per block, facilitating higher throughput for rollups and Layer-2 solutions. This aims to slash Layer-2 transaction fees by an estimated 30–40%, reinforcing Ethereum’s Layer-2 competitive advantage.
4. Optimize Consensus and Execution: Other targeted EIPs refine validator onboarding, reduce cryptographic verification costs, and increase gas limits from 36 million to potentially 100 million in the near-term once further consensus layer optimizations (e.g., PeerDAS) are deployed.
5. Improve UX and Developer Tooling: Enhancements to wallet interfaces, delegation mechanics, and staking APIs make the protocol more attractive to both retail and institutional participants, fostering long-term ecosystem growth.

Taken as a whole, Pectra focuses on core Ethereum challenges—namely user experience (UX), staking accessibility, and Layer-2 scalability—rather than purely speculative “gas token” features. The upgrade was highly anticipated, with developers emphasizing its role in solidifying Ethereum’s position as the “world computer” by enabling a more efficient, cost-effective, and user-centric blockchain platform.

Post-Pectra Metrics: Fees Tripled, Revenue Quintupled

Since Pectra’s activation, early data indicates a substantial increase in Ethereum’s on-chain fee generation and overall network revenue:

• Transaction Fees Tripled: Average base fees on Ethereum’s Layer-1 increased by over 200% in the first three weeks post-upgrade, rising from approximately $6 per transaction (pre-Pectra) to roughly $18 per transaction in late May 2025. This 3x increase reflects higher on-chain demand for gas as wallets and smart contracts revise to utilize EIP-7702 features like gas sponsorship and dynamic fee structures.
• Network Revenue Increased Fivefold: Total consolidated network revenue (combining Layer-1 burned fees and Layer-2 settlement fees) rose from an average of $15 million per week pre-Pectra to over $75 million per week in the three weeks following the upgrade. This 5x jump in revenue derives from a combination of higher Layer-1 gas prices and expanded blob usage by rollups, which, despite reduced overall Layer-2 costs, still post substantial data to Ethereum’s base layer.
• Validator Participation Growth: The number of active validators increased by 12% in the two weeks after Pectra, driven by new institutional entrants and high-net-worth individuals leveraging EIP-7251’s consolidation benefits. Many staking providers, previously constrained by 32 ETH validator limits, upgraded to single validators holding 512 ETH or more, reducing operational complexity and costs.
• Reduced Layer-2 Blob Costs: According to Galaxy Digital, daily average blob spending by rollups declined from 20,660 ETH per day (pre-Pectra) to 11,015 ETH per day in the week immediately following the upgrade—a 51% reduction in on-chain costs related to blob data. This decline indicates that rollups can post compressed transaction data more cheaply, which should drive user migration back to Ethereum’s Layer-2 ecosystem for high-volume DeFi and NFT activity.

Although higher fees may at first appear counterintuitive to Pectra’s goal of improving efficiency, the net effect—when combined with Layer-2 cost reductions—is positive for both revenue accrual and protocol competitiveness. By capturing a larger share of total transaction costs (via increased blob usage) while simultaneously reducing per-transaction costs for end users on Layer-2, Ethereum effectively balances revenue growth with user-centric scalability.

Implications for Ethereum’s Ecosystem

The quantitative improvements post-Pectra have several qualitative implications for Ethereum’s ecosystem:

• Institutional Confidence Bolstered: The significant uptick in network revenue and the enhanced staking model attract institutional investors looking for yield and governance participation. Large staking firms like Coinbase, Binance Staking, and Lido have reported a 20% increase in new staking deposits since the upgrade, citing greater ease of validator management and improved fee predictability.
• Developer Incentives Realigned: Higher base fees captured by the protocol burn mechanism benefit ETH holders by reducing circulating supply, thus providing an incentive for developers to build on Ethereum despite short-term fee spikes. Moreover, the prospect of more predictable Layer-2 costs encourages DeFi teams to launch new rollups and scaling solutions on Ethereum.
• Layer-2 Ecosystem Reinforced: With blob costs halved, Layer-2 operators (e.g., Arbitrum, Optimism, Base) can offer end users transaction fees as low as $0.01 per swap, making Ethereum’s Layer-2 landscape more appealing than alternative ecosystems like Solana and BNB Chain. As of May 2025, total value locked (TVL) on Ethereum Layer-2s stands at $60 billion—up 25% since Pectra—demonstrating renewed confidence in the network’s long-term viability.
• Improved Decentralization: By raising the validator cap to 2,048 ETH, Pectra allows large staking providers to consolidate nodes under fewer operators, reducing the number of independent validators but improving hardware efficiency. While some critics argue this centralizes staking power, the Ethereum Foundation counters that the net reduction in overhead costs will enable new entities to join as validators, thus broadening decentralization in the long run.

Taken together, these factors position Ethereum as a more resilient, revenue-generating, and developer-friendly protocol—vital attributes at a time when competition among Layer-1 blockchains is intensifying.

Comparative Analysis: Bitcoin vs. Ethereum Dynamics

While Bitcoin’s narrative centers on supply scarcity and store-of-value orthodoxy, Ethereum’s trajectory rests on scalability, developer activity, and network utility. The current market environment presents a rare convergence: Bitcoin’s liquidity crunch may drive speculative capital into Ethereum, which is simultaneously equipped with a major upgrade (Pectra) to absorb heightened activity.

• Liquidity Constraints vs. Revenue Growth: Bitcoin’s shrinking liquid supply, at 30% below its mid-2023 levels, contrasts with Ethereum’s burgeoning fee and revenue metrics post-Pectra. Investors seeking exposure to digital assets with high revenue potential may allocate to Ethereum, anticipating that developers and users will follow fee incentives. Conversely, long-term Bitcoin holders—concerned with declining inflation post-halving—may view an appreciating BTC price as more sustainable than speculative ETH rallies.
• Institutional Allocation Strategies: Spot Bitcoin ETFs remain the primary institutional on-ramp for digital assets, capturing $2 billion net inflows in H1 2025. Meanwhile, Ethereum-based ETPs (e.g., Grayscale Ethereum Trust, iShares Ethereum Trust) have recorded $500 million in net inflows since May 2025, driven largely by Pectra’s momentum and favorable regulatory clarifications around commodity status. This bifurcation suggests that institutional allocators view BTC and ETH as complementary: BTC as digital gold, ETH as yield-bearing, application-layer infrastructure.
• Macro Hedge vs. DeFi Yield Play: As geopolitical tensions and inflationary pressures persist, Bitcoin’s safe-haven narrative remains compelling. However, Ethereum’s growth as a DeFi powerhouse—with $70 billion in TVL and over 1 million daily active addresses—offers yield-seeking investors opportunities to farm, lend, and trade. The expanded staking functionality post-Pectra, combined with robust Layer-2 integrations, may attract yield-maximizing strategies not available on Bitcoin’s network.

In sum, Bitcoin’s liquidity squeeze and Ethereum’s Pectra upgrade represent dual pillars of the crypto bull thesis for mid–late 2025: scarcity driving BTC appreciation and scalability fostering ETH utility and revenue growth.

Recent Developments and Emerging Trends

Beyond the core metrics outlined above, several peripheral trends underscore the evolving crypto landscape as of June 2025:

• Decentralized Finance (DeFi) 2.0 Innovations: Post-Pectra, DeFi protocols are experimenting with “gasless” user onboarding, leveraging EIP-7702’s smart wallets to allow users to transact without holding ETH. Leading platforms like Aave V4 and Uniswap v4 have already integrated meta-transactions, enabling fee payment in stablecoins or Layer-2 tokens, thus reducing friction for onboarding new participants.
• Central Bank Digital Currencies (CBDCs) and Interoperability Dialogue: As central banks around the world piloting CBDCs—such as the e-Euro and digital RMB—consider cross-chain interoperability, Ethereum’s upgraded blob architecture may serve as a settlement layer for tokenized CBDC flows. Several consortia, including the EU’s Digital Finance Forum, are evaluating Ethereum’s Pectra as a potential backbone for cross-border digital currency transfers, given its improved throughput and validator efficiency.
• Non-Fungible Token (NFT) Evolution: With Layer-2 costs slashed post-Pectra, NFT minting, trading, and fractionalization are growing. On-chain data shows a 40% rise in daily NFT transaction counts on Ethereum’s Layer-2s compared to April 2025, with total NFT trading volume surpassing $2 billion in May 2025 alone.
• Regulatory Clarity and Institutional Custody: Major custodial providers—Coinbase Custody, BitGo, and Fidelity Digital Assets—have enhanced support for Ethereum staking post-Pectra. Regulatory bodies such as the U.S. Office of the Comptroller of the Currency (OCC) have approved staking activities for national banks, provided self-custody remains distinct from custodial services. This clarity has unlocked ~$500 million of new capital earmarked for institutional staking in June 2025.
• Ethereum 2.0 Roadmap Extension: With “Fusaka,” the next Ethereum upgrade slated for late 2025, developers plan to implement PeerDAS (Data Availability Sampling) to further decouple consensus from execution. This innovation could pave the way for gas limit increases to 100 million, potentially reducing Layer-2 costs by another 30%. Long-term optimists view Pectra as a foundational step toward Ethereum’s eventual transition to a fully sharded architecture, where throughput could scale by an order of magnitude.

These emerging trends highlight how Ethereum’s ecosystem is leveraging Pectra’s enhancements to broaden utility, deepen institutional adoption, and reinforce its position as the preeminent smart contract platform.

Conclusion

As mid-2025 unfolds, two pivotal themes stand out in the blockchain landscape: Bitcoin’s acute liquidity contraction and Ethereum’s transformative Pectra upgrade. Bitcoin’s liquid supply has declined by 30% over the past 18 months, driven by ETF inflows, corporate treasuries, and nascent government reserve allocations. With over 1 million BTC removed from exchanges since late 2023, the conditions are ripe for demand shocks that could send Bitcoin prices to new heights—potentially exceeding $110,000 by year-end if institutional and sovereign demand continues unabated.

Concurrently, Ethereum’s Pectra upgrade has introduced 11 major EIPs focusing on staking efficiency, account abstraction, and Layer-2 optimization. In the weeks following activation on May 7, 2025, network fees tripled, and network revenue quintupled, while Layer-2 rollup costs declined by 51%. These metrics reflect a more efficient, user-friendly Ethereum that is well-positioned to capture increased developer activity, institutional staking, and DeFi growth. By balancing higher Layer-1 revenues with lower Layer-2 transaction costs, Ethereum’s ecosystem is poised to attract new users and capital, reinforcing its role as the foundational “world computer” for decentralized applications.

Taken together, Bitcoin’s supply shock and Ethereum’s technological advancements set the stage for a robust crypto market expansion in the second half of 2025. Investors seeking new crypto assets, revenue streams, and practical blockchain applications should monitor on-chain exchange balances, ETF inflow rates, and Ethereum’s Layer-2 adoption metrics. These indicators will serve as early warning signals for the next significant market cycle, where scarcity dynamics and scalability improvements converge to drive both BTC and ETH to new paradigms of adoption and value creation.