The amount of bitcoin held across all exchanges fell sharply last week, which was interpreted as a positive for the bitcoin market based on previous experience.
However, the changing dynamics of the market show that as the crypto market grows in size, relying on just one or two metrics cannot always reveal the entire picture of what’s going on.
According to data from blockchain data firm Glassnode, the total balance of bitcoin on all exchanges fell 4.1 percent to 2.48 million in the last four days of July, from 2.587 million.
The market’s initial reaction to the drop was positive because a decrease in the number of bitcoin held on all exchanges coincided with a price rally as recently as September.
The underlying logic is straightforward: as investors became more optimistic about the long-term value of their bitcoin holdings, more BTC was moved off exchanges, potentially to cold storage wallets.
However, after taking a closer look at the data, analysts concluded that the recent drop, which was much steeper than the previous one, may not necessarily reflect just bullish sentiment.
Willy Woo, an independent blockchain data analyst, told us that it is “really difficult to know what’s happening with just one dimension.” “As the network evolves, so does the measuring stick.”
Indeed, just as the market began to notice the drop, crypto exchange Kraken, for example, announced last week that the bitcoin balance drop on its exchange was the result of internal transfers, dampening some of the initial excitement.
“We can’t confirm that the drop isn’t entirely due to internal transfers between exchanges,” said Philip Gradwell, chief economist at blockchain data firm Chainalysis. “Some are, but not all, and potential withdrawals must be monitored for a longer period of time to determine whether they are genuine withdrawals.
“This makes providing definitive statements on exchange balances far back in time very difficult,” he concluded. “We are working on improving our understanding of this.”
According to Clara Medalie, research lead at blockchain data firm Kaiko, while it is easy to identify which addresses belong to an exchange, many more entities, such as over-the-counter (OTC) desks and brokers associated with the exchanges, are receiving a large amount of bitcoin.
“As a result, measuring an exchange outflow is difficult because these transfers could very well be sent to other exchanges or trading desks, or simply between addresses on the same exchange,” Medalie explained.
Bullish, but cautiously bullish
Some argue, however, that by looking at a few other blockchain data metrics, last week’s drop in bitcoin’s exchange balance may still reflect a bullish market sentiment on the whole.
Woo told us that when the price of bitcoin dropped last week, the cohorts owning small, medium, and large amounts of bitcoin increased their holdings, indicating some aggressive purchases by both bitcoin whales (large holders) and smaller investors.
Because of increased hoarding by investors and the permanent loss of mined BTC over the years, the actual number of BTC available for trading is much lower than bitcoin’s current supply of 18.77 million, or 89 percent of the 21 million cap. A decrease in BTC balances on exchanges and an increase in BTC balances of holders across their wallet addresses suggest that some of the coins were sold to buyers off exchanges.
The largest of the whales could be exchanged that were previously thought to be distinct separate entities, but we now know that they were exchanges all along,” Woo explained. “‘From shrimps (bitcoin holders with less than one BTC) to smaller whales, everyone increased their holdings… Because these guys are unlikely to be exchanged, it validates that the majority of the coins that left exchanges are genuine.”
According to Glassnode data, the total circulating supply held by entities with varying amounts of BTC increased over the last two weeks, with the exception of entities with balances between 100 and 1,000 BTC and those with balances greater than 100,000 BTC.
“When I see large outflows like this, I believe traders ‘like the price’ and are willing to hold for a longer period of time,” said George Kaloudis. “It certainly demonstrates that investors are more willing to ride out the storm in the short term, given the friction of moving funds back onto exchanges to liquidate.”
Alterations in preferred exchanges
According to Chainalysis’ analysis, the outflows of bitcoin balances on exchanges are also case-by-case, indicating that some investors and traders may have changed their preferred platforms for trading and other crypto activities.
The drop in the number of bitcoin held on crypto-to-crypto exchanges has been much steeper than the drop in bitcoin balances on crypto-to-fiat exchanges since May 1, as shown in the chart below.
“I believe a large portion of the bitcoin that has been withdrawn is moving exchanges as people change which exchanges they trade on,” Gradwell explained.
Although it is unclear what prompted traders and investors to change their preferred crypto exchanges, Binance, the most popular crypto exchange by trading volume, has faced tougher regulatory actions in countries around the world.
Bitcoin’s recent outflows from exchanges were “likely catalyzed by Binance’s announcement of dramatically lower withdrawal limits for non-KYC (know-your-customer) customers,” blockchain research firm Delphi Digital wrote in its daily market update on July 29, noting that Binance and Coinbase were the top two exchanges in terms of absolute outflows.
Binance has also announced that users in Germany, Italy, and the Netherlands will be unable to open new futures and derivative positions on the platform.
According to Kaloudis, the shift in preference for crypto-to-fiat exchanges could also indicate that new crypto investors are more comfortable with only bitcoin investments.
“We are seeing new entrants into the bitcoin market who are presumably less comfortable trading across cryptos in general, [which] theoretically is more bullish for bitcoin adoption,” he said.