Bitcoin [BTC] is once again drawing attention across the crypto landscape—this time, not because of price volatility, but due to a major shift in its underlying market dynamics. Recent on-chain data reveals that Bitcoin held on exchanges has fallen to its lowest level in seven years, setting the stage for what some analysts believe could be a massive supply squeeze.

As of July 2025, only 14% of Bitcoin’s total circulating supply remains on centralized exchanges, marking a sharp 9.4% drop in just the past month. In absolute terms, exchange balances fell from 3.09 million BTC to 2.8 million BTC in June alone. This drop is significant, and it’s one of the clearest indicators yet of growing investor preference to hold Bitcoin in private wallets rather than keeping it on trading platforms.

Historically, such sustained outflows from exchanges have often preceded major bullish moves. Why? Because fewer coins available on exchanges typically mean less immediate sell pressure, while also hinting at increased long-term confidence among holders. In market terms, this is a classic recipe for a supply-demand imbalance, particularly when accompanied by a rise in spot market volume—and that’s exactly what we’re starting to see.

Despite some price choppiness, Bitcoin bulls have shown renewed conviction. A strategic short liquidation worth $40 million near the $104,984 level recently fueled an intraday rally, pushing BTC back up to $107,000, a 1.17% increase at press time. While that may seem like a small gain, it’s a sign that bulls are regaining control of price momentum, especially after weeks of sideways action.

But this recent move isn’t just about liquidations. Under the surface, there’s a more important narrative taking shape: Bitcoin’s liquidity is drying up, while spot demand is gradually increasing.

A deeper dive into volume data shows that the spot-to-derivatives trading volume ratio has been rising after hitting a seven-month low in late May. According to CryptoQuant, this key indicator has now reversed sharply upward, signaling a possible transition from speculation-driven rallies to more organic, investor-led buying activity.

Back in May, Bitcoin reached its all-time high during a period when this ratio was at just 0.05, suggesting that the rally was primarily driven by derivatives and leveraged positions. That same leverage was a double-edged sword: when prices corrected, over-leveraged traders were liquidated, sending BTC back below $100,000 almost effortlessly.

Now, however, the market appears to be on firmer footing. With 86% of BTC now off exchanges and more trading activity coming from spot buyers, Bitcoin may be in the early stages of a more sustainable upward move. This situation is particularly important because it implies less risk of sudden liquidation cascades, which have historically suppressed price growth in highly leveraged environments.

Still, analysts caution that while the structural conditions are in place for a rally, one key catalyst is still needed: confirmation that demand is not only returning but accelerating. If spot buyers continue to gain dominance and if Bitcoin can flip its $111,000 resistance level into support, the groundwork for a high-momentum breakout could be fully laid.

Looking ahead, all eyes will be on the next few weeks. If exchange supply continues to drop and spot volumes keep rising, a classic supply squeeze scenario could play out. This would involve high demand chasing a shrinking pool of available BTC, leading to rapid repricing as buyers are forced to pay increasingly higher premiums to secure coins.

In simpler terms, Bitcoin may be coiling up for its next explosive move. With its liquid supply at a multi-year low, and long-term holders firmly in control, the market may soon witness the kind of breakout that few traders are currently positioned for.

For now, Bitcoin continues to trade in a tight range, but behind the scenes, fundamental forces are aligning. If history is any guide, such quiet accumulation phases often end in violent upward moves—especially when supply runs thin.