What does Bitcoin’s sharp drop in trade balance really mean last week?

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The amount of bitcoin held on all exchanges fell sharply over the past week, a sign which, based on past experience, was seen as positive for the bitcoin market.

But changing market dynamics show that as the crypto market grows, relying on one or two metrics can’t always tell the whole story of what’s going on.

Data from blockchain data firm Glassnode shows the bitcoin balance on all exchanges fell 4.1% to 2.48 million from 2.587 million in the last four days of July.

Bitcoin balance on all exchanges.

Source: Glassnode

The initial market reaction to the downside was positive, as just last September a decrease in the number of bitcoins held on all exchanges came along with a rise in prices.

The assumed logic is simple: more BTC has been taken off the exchanges, potentially into cold storage wallets, as investors have become more optimistic about the long-term value of their bitcoin holdings.

But after analysts took a closer look at the data, especially since the recent drop was much steeper than the previous one, they said the drop didn’t necessarily reflect bullish sentiment alone.

It’s really hard to know what’s going on with a single dimension, Willy Woo, an independent blockchain data analyst, told CoinDesk. As the network changes, the measuring stick follows it.

Indeed, just as the market was starting to notice the decline, the Kraken crypto exchange, for example, announced last week that the declining bitcoin balance on its exchange was the result of its internal transfers, which have immediately dampened some of the initial excitement.

We cannot confirm that the drop is not entirely due to internal transfer exchanges, said Philip Gradwell, chief economist at blockchain data firm Chainalysis. Some are, but not all, and potential withdrawals need to be observed longer to see if they are actual withdrawals.

This makes it quite difficult to make definitive statements on trade balances in the past, he concluded. We are working on an improvement to understand this.

Clara Medalie, head of research at blockchain data firm Kaiko, said that while it’s easy to tell which addresses belong to an exchange, many other entities such as over-the-counter (OTC) offices and brokers associated with exchanges receive a lot of bitcoins.

So, it’s difficult to actually measure a trade exit because those transfers could very well just be sent to other exchanges or trading bureaus, or just between addresses on the same exchange, Medalie said.

Bullish, but cautiously bullish

Some argue, however, that by looking at a few other blockchain data metrics as well, the decline in bitcoin’s trade balance last week could still reflect bullish sentiment in the market as a whole.

Woo told CoinDesk that when the drop took place last week, the holdings of cohorts with small, medium and large amounts of bitcoin increased, showing aggressive buying by bitcoin whales (large holders) and small investors.

As CoinDesk reported, the actual number of BTCs available for trading is much lower than the current bitcoin supply at 18.77 million, or 89% of the 21 million cap, due to increased hoarding by investors and of the permanent loss of BTC mined over the years. A drop in the BTC balance on exchanges and an increase in holders’ BTC balances on their wallet addresses indicate that some of the coins have been sold to buyers outside of the exchanges.

The larger of the whales may be exchanges that were previously considered separate, separate entities, but now we find out that they were exchanges from the start, Woo said. Shrimp (bitcoin holders with less than a BTC) to smaller whales have all increased their holdings.

As Glassnode data shows, over the past two weeks, the total outstanding supply held by entities with different amounts of BTC has all increased except for entities with balances between 100 and 1,000 BTC. and those with balances over 100,000 BTC.

For example, the total outstanding supply held by entities with BTC balances between 10,000 and 100,000 has increased over the past two weeks.

Source: Glassnode

When I see big releases like this, I think traders love the price and are willing to hold on for a longer period of time, said George Kaloudis, research associate at CoinDesk. This certainly shows that investors are more willing to weather the storm in the short term given the frictions associated with the return of funds to the exchanges to liquidate them.

Changes in Preferred Exchanges

Bitcoin balance exits on the exchanges, based on Chainalysis’s analysis, are also a case-by-case situation, an indication that some investors and traders may have changed their preferred platforms for trading and other crypto activity. .

As the graph below shows, the decline in the number of bitcoins held on crypto-to-crypto exchanges has been much larger than the decline in bitcoin balances on crypto-to-fiat exchanges since May 1.

Source: chain analysis

I think a lot of the bitcoin that has been taken out is moving exchanges, as people change the exchanges they trade on, Gradwell said.

While it is not clear what triggered the change in crypto exchanges preferred by traders and investors, Binance, the most popular crypto exchange in terms of trading volume, has faced regulatory action. more stringent in countries around the world.

Bitcoin’s recent exits from the exchanges “were likely catalyzed by Binance’s announcement of significantly lower withdrawal limits for non-KYC (know your client) clients,” blockchain research firm Delphi Digital wrote in its update. daily market day on July 29, which also noted that Binance and Coinbase were the top two exchanges in terms of absolute exits.

Binance also said that its users in Germany, Italy and the Netherlands will not be able to open new futures and derivative positions on the platform.

On the flip side, the change in preference for crypto-fiat exchanges could also signal that new crypto investors are more comfortable with bitcoin-only investments, according to CoinDesks Kaloudis.

We are seeing new entrants to the bitcoin market who are likely less comfortable trading cryptos in general, [which is] theoretically more optimistic for bitcoin adoption, he said.

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