- Bitcoin supply on centralized exchanges has fallen continuously since 2020.
- This has meant that coin holders have increasingly adopted a long-term investment view.
The amount of Bitcoin [BTC] held on centralized cryptocurrency exchanges have fallen to the lowest level since December 2017, according to on-chain data obtained from CryptoQuant.
The main currency’s foreign exchange reserve peaked at 3.08 million on March 2, 2022, after which it started to decline. At the time of writing, there are still 2.01 million BTC on the exchanges, which represents a decline of 34% over the past three years.
Source: CryptoQuant
Why the decline?
The decline in the amount of BTC held on centralized exchanges to a six-year low can be seen as a direct result of the collapse of the FTX and the broader turmoil within the crypto industry.
Investors, shaken by the FTX debacle and increased scrutiny from regulators like the SEC, are choosing to take control of their assets, turn away from centralized platforms and embrace self-custody solutions.
This trend towards self-custody indicates a growing sentiment among investors that BTC is a long-term asset worth holding rather than actively trading.
At the time of writing, BTC was trading at an 18-month high of $43,000. On-chain data showed that many long-term holders have refused to sell their coins in anticipation of more profits.
However, a closer look at investors’ long-term trading activities revealed that part of this investor class is still underwater. In a recent one reportfound the pseudonymous CryptoQuant analyst IT Tech:
“For example, the cohort that invested in BTC two to three years ago is still struggling with an average realized price of $45,000, resulting in a continued average loss.”
Nevertheless, over the years, market participants have increasingly come to view BTC as a long-term asset to be held. Hence the steady decline in foreign exchange reserves.
Why this could be a problem
However, as the BTC exchange reserve continues to decline, it could have a significant impact on market liquidity. This is because as fewer investors hold their BTC on exchanges, there will be fewer coins available to trade.
This would result in a smaller order book, with the number of buy and sell orders decreasing. This can make it difficult to fulfill large orders.
Read Bitcoin (BTC) price prediction 2023-24
If fewer orders are available, the difference between the bid and ask prices increases. This could result in an increase in the cost of trading BTC as traders have to pay more to execute their orders.
Finally, reduced liquidity can increase price volatility because small orders can significantly affect the market price.