Bitcoin Reserves on Cryptocurrency Exchanges Plummet to 2 Million, Lowest Since January 2018

Data compiled by CryptoQuant reveals a notable 4% decrease in the amount of BTC held within wallets associated with cryptocurrency exchanges over the course of this month.

Bitcoin (BTC) held within addresses linked to centralized exchanges has reached its lowest point in over five years, reflecting a maturing market environment. The quantity of BTC, often referred to as the exchange reserve, has experienced a 4% drop, totaling 2 million BTC (equivalent to $54.5 billion) this month. This marks the lowest level observed since early January 2018, as reported by the on-chain data analytics service CryptoQuant.

The implications of this decline are multifaceted, reflecting both positive and negative developments within the cryptocurrency ecosystem. Among the positive aspects is the growing popularity of services such as Copper's ClearLoop, enabling users to trade without the necessity of transferring funds to centralized exchanges.

Markus Thielen, Head of Research and Strategy at Matrixport, noted, "This decrease is, in part, due to the increased demand for services like Copper's ClearLoop, which only requires a minimum amount of coins to be held on exchanges. This trend aligns with the natural evolution of the crypto market, where exchanges will gradually operate with lower balances. Over time, this could diminish the significance of cryptocurrency exchanges, prompting them to explore novel business models to sustain profitability."

Matrixport became a part of ClearLoop in May, offering institutional clients settlement options off the traditional exchange platforms.

Lack of trust

The declining balance on exchanges can also be attributed to the loss of trust stemming from incidents like the collapse of FTX, led by Sam Bankman-Fried, in November of the previous year. This prompted investors to seek alternatives to centralized exchanges for holding their assets. FTX, once one of the world's top exchanges by trading volume, mishandled user funds, eroding investor confidence. According to Thielen, the diminishing exchange balance echoes this shift in sentiment.

"The misuse of customer funds involving FTX's leadership has reminded investors about the significance of self-custody," Thielen commented.

A recent report from PricewaterhouseCoopers highlighted that within the crypto hedge fund sector, a majority of players now opt for various forms of custody. Only 9% of respondents indicated they exclusively leave their coins on exchanges.

 

Custodial Approaches Among Leading Four Strategies (PwC)

Different investment strategies, including market-neutral, discretionary long-only, and quantitative long/short, demonstrate a strong preference for third-party custodians. Notably, funds employing a long-only strategy exhibit the smallest holdings on exchanges, whether commingled or segregated.

This trend could signify a growing inclination among investors to directly custody their assets for the long term, potentially in anticipation of future price appreciation. This interpretation aligns with a bullish outlook on cryptocurrency's long-term potential. According to Thielen, "Following the price declines of 2022, investors are increasingly adopting a buy-and-hold investment approach."