Bitcoin holdings on exchanges drop to 2M, lowest since Jan 2018

Bitcoin holdings on exchanges drop to 2M, lowest since Jan 2018

The Blockchain Industry: A Look at Declining Bitcoin Reserves on Centralized Exchanges

The blockchain industry is witnessing a decline in the number of Bitcoin (BTC) held in addresses tied to centralized exchanges. This decrease reflects a growing market sophistication and is suggestive of both positive and negative developments within the industry. As per on-chain data analytics service CryptoQuant, the exchange reserve has dropped 4% to 2 million BTC ($54.5 billion) in the current month, marking the lowest level since early January 2018.

The Rise of Alternative Trading Services

One of the contributing factors to this decline is the rising popularity of alternative trading services. An example is Copper’s ClearLoop, which allows users to trade without actually moving their funds to centralized exchanges. As a result, users can enjoy the benefits of trading while still maintaining control over their assets. This development aligns with the natural progression of the crypto market, where exchanges will have to adapt to lower balances. Markus Thielen, Head of Research and Strategy at Matrixport, suggests that over time, this trend will render exchanges less important and prompt them to explore new business models for sustaining profitability.

Matrixport joined ClearLoop in May, offering institutional clients the opportunity to settle transactions off-exchange. This move is in line with the industry’s overall shift towards self-custody and the desire to maintain control over assets. Trust is a crucial aspect within the blockchain industry, and recent events have highlighted the importance of self-custody. For instance, when Sam Bankman-Fried’s exchange, FTX, went bankrupt in November 2021, it was revealed that user funds had been commingled, denting investor confidence. As a result, investors have become increasingly cautious and have started preferring to keep their coins away from centralized exchanges.

Mitigating Risk through Multiple Forms of Custody

According to PricewaterhouseCoopers’ (PwC) annual global crypto hedge fund report, the majority of industry players now opt for multiple forms of custody rather than exclusively relying on exchanges. The report indicates that only 9% of respondents stated they left their coins exclusively on exchanges.

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The report also highlighted that market-neutral, discretionary long-only strategies, quantitative long/short strategies, and discretionary long/short strategies overwhelmingly prefer third-party custodians. Among these strategies, funds with a long-only approach tend to hold the fewest coins on exchanges, in both commingled and segregated accounts. This cautious approach demonstrates the industry’s aim to mitigate as much risk as possible after the events of the previous year.

Dwindling Exchange Balance: Sign of Investor Confidence in the Long Term

The decline in the exchange balance can be interpreted in two ways. On the one hand, it indicates investor preference for taking direct custody of coins and holding them for the long term, potentially anticipating a price increase. This interpretation demonstrates investors’ confidence in the long-term prospects of cryptocurrencies.

Despite the decline in exchange reserves, Thielen maintains that this bullish interpretation is still valid. He suggests that after the price declines experienced in 2022, investors have adopted a “buy-and-hold” investment approach. This strategy further reinforces the notion that investors see cryptocurrencies as a valuable long-term investment.

Conclusion

The decreasing number of Bitcoin reserves held in addresses tied to centralized exchanges speaks volumes about the evolving nature of the blockchain industry. The rise of alternative trading services, such as ClearLoop, reflects an increasingly sophisticated market where users seek greater control over their assets. Similarly, the industry’s shift towards multiple forms of custody demonstrates a commitment to mitigating risk and maintaining investor trust.

While the declining exchange balance may initially raise concerns, it primarily represents investor confidence in the long-term prospects of cryptocurrencies. Investors are opting to hold their coins for extended periods, showcasing their belief in the potential for price appreciation.

As the blockchain industry continues to evolve, centralized exchanges will need to adapt to these changing dynamics. Embracing lower balances and exploring new business models will be essential to ensure profitability in this shifting landscape. By working towards maintaining trust and providing secure custody solutions, the industry can enhance its overall credibility and attract a larger range of participants.

This article has been edited by Sheldon Reback.

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