Bitcoin Holdings on Exchanges Hit Five-Year Low: Analyzing the Key Factors

By CryptoGlobe August 31, 2023 In Bitcoin, Exchanges

The quantity of Bitcoin (BTC) stored in wallets linked to centralized exchanges has descended to its lowest point in over five years, according to a CoinDesk report published earlier today.

Data from CryptoQuant, an on-chain analytics service, indicates that the exchange reserve has shrunk by 4% this month, settling at 2 million BTC, or roughly $54.5 billion. This is the lowest level observed since January 2018.

This downturn is influenced by a mix of both positive and negative market dynamics. The CoinDesk report says that, on the upside, services like crypto custodian Copper’s Clearloop are gaining traction. Clearloop permits users to execute trades without the need to move their assets to centralized exchanges.

Back in May, Matrixport, an all-in-one crypto financial services platform, partnered with Copper to improve Matrixport’s prime brokerage services for institutional clients. The partnership integrated Matrixport with Copper’s ClearLoop network, enabling off-exchange settlements. Clearloop connects multiple exchanges securely, allowing investors to hold assets until just before a trade. This allowed Matrixport’s institutional clients to trade via sub-accounts within Copper’s infrastructure, reducing exchange counterparty risks and enhancing capital efficiency. Copper’s CEO, Dmitry Tokarev, emphasized that the collaboration aimed to fortify the digital asset industry’s financial market infrastructure.

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Markus Thielen, Head of Research and Strategy at Matrixport, told CoinDesk that this is a natural evolution in the crypto market:

It partly reflects the increased demand for services like Copper’s Clearloop, which requires only a minimum of coins to be posted on exchanges, that are a natural progression of the crypto market where exchanges will have to work with lower balances. Over time, this will make crypto currency’s exchanges less important and exchanges might have to find new business models to keep profitability high.

The CoinDesk report went on to say that, conversely, the downfall of FTX, previously the world’s third-largest exchange by trading volume, in November last year has led to a decline in trust in centralized platforms. Thielen attributes the reduced balance on exchanges to this erosion of confidence, stating that the FTX debacle has reminded investors of the importance of self-custody.

CoinDesk also cited a recent PricewaterhouseCoopers report, which revealed that only 9% of industry participants exclusively store their coins on exchanges. The majority opt for multiple custody options, particularly third-party custodians, to minimize risk.

Another perspective highlighted by CoinDesk is the shift toward long-term investment strategies by investors. Following the price drops in 2022, many are adopting a buy-and-hold approach, further diminishing the need to keep assets on exchanges. Thielen confirms that this optimistic view of cryptocurrency’s long-term prospects remains valid despite the reduced exchange reserves.

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