Glassnode Series: BTC Exchange Balance (EB) Analysis
27 May 2021
In this article we will be looking at what the BTC exchange balance (EB) is, what it means for the price of Bitcoin and potential future exchange balance trends.
What is EB?
EB is the amount of BTC which an exchange has available or holds. For example, in the chart below we can see the overall EB from all major exchanges between 29/02/12 – 13/03/21. Typically the larger the exchange the higher the EB for BTC.
- 29/02/20 - exchanges held 3,003,227 BTC
- 13/03/201 - exchanges held 3,055,936 BTC
By looking at this chart we can see that during the COVID crash, the amount of BTC which exchanges held increased by around 52,000 BTC.
EB for BTC during March 2020
Why do exchanges hold BTC?
Exchanges hold BTC for multiple reasons, whether it be as reserves, investments or to provide liquidity to their users.
How much BTC is currently held by exchanges?
As of 18/05/2021, 2,536,290 BTC is held on exchanges. In the chart below we can see how the amount of BTC held on exchanges has increased over time. It is important to note that MtGox is not included on this chart*.
*MtGox handled 70% of BTC transactions between 2013 - 2014. MtGox also held around 850,000 BTC which was owned by many users. Although the saying not your wallet - not your coins was really founded here. Most users lost their BTC when MtGox was hacked.
BTC EB over time
Previous bull runs
2012 - 2013
During the first BTC bull run, BTC exchanges started to emerge. Back in 2012 BTC exchanges were unreliable and many people using or who knew about BTC had great technical knowledge and typically stored their BTC on cold wallets.
However, during the 2012 - 2013 bull run people started to trade BTC and store it on exchanges. This change was largely due to the introduction of Mt. Gox, with other exchanges such as Coinbase arriving at a similar time (Coinbase founded 20/05/12). At the start of 2012 the amount of BTC on exchanges was at 931 BTC while BTC was trading at $2.30 USD - clearly showing that people did not use exchanges. However, by the end of 2013 the exchange balance was up to 323,000 BTC.
Increased adoption of BTC saw users deposit their BTC into exchanges which would allow them to trade and sell their BTC easily.
BTC exchange balance early 2012 - late 2013
2016 - 2017
In the chart below, we can see that during the 2016-17 bull run BTC was being swept up by exchanges. At the start of the bull run (BTC price $573.63 USD) exchanges held 1,009,126 BTC in total. By the end of the bull run, once BTC had hit the previous long term ATH of $20,000 USD, the EB of BTC was at 1,969,646 BTC. This was almost a 100% increase in BTC held on exchanges during this run.
With 2016 - 2017 and 2012 - 2013 there is the clear similarity that exchanges were loading up on BTC (or being used more by users who deposited into the exchange). From looking at the correlation of exchange balance to the BTC price, there is a clear x = y correlation. When BTC went up so did the exchange balance. When BTC went down so did the exchange balance.
BTC held on exchanges during the 2016 - 2017 bull run
The 2020 - x bull run
This is where things start to get interesting.
During the previous two BTC bull runs, exchanges were loaded up with BTC, the amount of BTC on exchanges increasing substantially over the two runs. However, during the bull run so far the EB has consistently been decreasing. Rather than it being x = y it is now y = - x. When the price of Bitcoin increases EB decreases, when BTC price decreases EB increases.
Let's take a deeper look into individual exchanges to try and find out what is going on..
EB on exchanges decreasing during current bull run
One of the major exchanges who have seen their EB lower significantly is Coinbase. On 18/03/20 at the height of COVID panic Coinbase had an EB of 1,012,810 BTC with the amount of BTC on Coinbase remaining stagnant until December 2020. From December 2020 Coinbase EB fell from 1,004,997 to 735,857 - a reduction of 26.791%.
Coinbase - BTC EB
Why has this occurred?
One possible explanation is that users are withdrawing their BTC from Coinbase and moving towards decentralized exchanges, DeFi applications and other projects. This may be to stake cryptocurrencies as users go towards long term holding rather than trading. With these new projects users have the incentive of improved APY in comparison to those seen on Coinbase and other centralised exchanges.
For example USD APY on Coinbase is at 0.15% and DAI APY from staking is at 2.00%. This is poor APY in comparison to DeFi projects - a few of which are listed below:
When looking at this, it is plausible that users are buying BTC and then moving to other platforms in order to earn better APY. However, for the average or new cryptocurrency user this process is still seen as relatively complex and lots of new cryptocurrency investors may not be aware of these options.
The introduction of these new platforms is highly likely to contribute to the overall change from x = y to y = -x in terms of the EB total. Users buy cryptocurrencies from a centralised exchange and then send their crypto to their MetaMask or a Solana wallet in order to gain better APY from their long term holding through using these new platforms.
This theory is backed when we look at multiple analysis techniques, the first being search engine trends*.
*For this section we will be using Google Trends. This is due to Google's current search engine monopoly (current market share 92.24%).
When looking at Google Trends we can see that the interest over time for MetaMask has increased substantially since the end of 2020, as shown below.
Below we can see that chart for the search term `crypto defi`, which has increased substantially since 26/05/20 - 26/05/21 as DeFi saw its adoption gear into overdrive. This coincides with the MetaMask increase, a wallet commonly used for DeFi applications on Ethereum.
Additionally when we look at `cryptocurrency staking we can see the interest has increased substantially over the past year.
When we go back to exchange data we can see that it is not just Coinbase who have seen their BTC EB fall. In the chart below it shows that Luno, Gate.io, Poloniex, Bitfinex, Bitstamp, Okex, Huobi and Coinbase have all seen a significant EB reduction.
|Exchange||BTC EB 25/03/20||BTC EB 26/05/21||% EB change|
On 25/03/20 the exchanges listed above had a combined BTC EB of 2,211,127, with this EB now standing at 1,378,314. This means that a total of 832,813 Bitcoins have left these exchanges either through these exchanges selling their reserves or most likely users have been moving their BTC from BTC to somewhere else.
We have already discussed the movement from these exchanges into new projects / protocols, although when looking at EB charts there is one clear outlier - Binance.
Binance is one of the largest cryptocurrency exchanges in the world with a 24hr trading volume of $41,739,964,260 (26/05/21) and 1079 trading pairs. When looking at the chart below we can see the increased EB of Binance.
Since 16/03/20, Binance has seen their EB increase from 258,506 to its current EB of 534,775. This is an increase of 106% - Binance have doubled their EB over the past year. Most of this EB growth has been seen during the parabolic stage of the BTC run. With EB increasing from 299,655 to 534,775 since 04/10/20.
When looking at the growth of the Binance EB against Coinbase while remembering the factors which affect EB (user crypto holding primarily) - it appears that Binance is drawing users from other cryptocurrency exchanges, with users taking their BTC with them.
When we compare the Google Trends around Binance against Coinbase we can see that, since the turn of 2021, Binance has been searched for much more than Coinbase*.
*In the chart below there is an anomaly showing a Coinbase spike in interest. This was due to the Coinbase stock market listing, not a sudden surge in users flocking towards Coinbase.
What does all this mean for BTC and the cryptocurrency market as a whole?
The cryptocurrency market is beginning to see a trend change. During the 2017 bull run the cryptocurrency market saw `fast money`. In 2017, users who entered the cryptocurrency space were looking to make themselves millionaires overnight. The technology behind a cryptocurrency didn't matter. Nor did the team behind a coin, the tokenomics or the long term roadmap. People wanted to get whatever cryptocurrency would make them rich. This is what led to the ICO boom where every ICO was filled almost instantly with alt coins then seeing explosive growth as soon as they hit the market. However, things are different this time.
Firstly, ICOs are not seeing explosive growth instantly when they hit the market. We can see this below with the charts of RAZE, XEND & CSPR all of which are great projects and had an ICO within the last two months.
Instead of ICOs users are shifting towards high % APY staking and farming. This may be because HODLing is becoming more popular than trading, supported by the exponential rise in ETH gas fees (needed for staking and yield farming). We can see the ETH gas fees below.
The benefit from this trend change is that it currently appears unlikely that the cryptocurrency market will see another crypto winter.
With users staking their cryptocurrencies for long periods of time this reduces a level of sell pressure. Cryptocurrency users will be looking towards long term gain, allowing for short term pain.
ETH is also being drained from exchanges with users staking their ETH in order to earn rewards by securing the network
The cryptocurrency market is becoming more decentralised
Users re-allocating their cryptocurrencies, moving them from exchanges into new platforms and projects in order to earn APY rewards is increasing decentralisation. When looking at exchanges, the grip which Binance has on the cryptocurrency exchange section of the market has been on the increase.
In the chart below we can see the spot volume over the past 24 hours on the top 13 exchanges.
In the pie charts below we can see the overall exchange EB% among the top 9 (BTC EB amount) exchanges.
It is clear that Binance and Gemini are eating away at the exchange dominance seen during the previous bull runs - especially with respect to Coinbase and Bitfinex. On the whole this is natural and not something to be concerned about. Exchanges rise and fall, as shown below.
It is not a similar scenario to what was seen during 2013/2014 when one exchange had complete dominance (i.e. Mt. Gox). The issue with a monopoly occurring within the cryptocurrency market was seen in 2014 when Mt. Gox was hacked; additionally if an exchange had a fixed monopoly within the cryptocurrency market they would have the ability for unprecedented market manipulation.
Through looking at the EB, we have been able to identify current exchange trends within the cryptocurrency market. While EB can be relevant to understand institutional movements versus retail (for example, institutions taking BTC off exchange and placing their assets in cold storage vs. retail users chasing high on-exchange APY), and while it can be useful to anticipate potential sell-offs or purchases by whales sending large amounts of BTC ahead of a sell-off (or to create FUD), in this article we have mostly used the EB to gauge potential market trends.
Through using the EB indicator and other analysis we have been able to see that staking cryptocurrencies is becoming ever more popular.
From here we could then draw the potential conclusion that DeFi projects, farming cryptocurrencies and PoS cryptocurrencies could be some of the top performing cryptocurrencies in the summer if BTC manages to regain its bullish momentum and if altcoins continue to perform well going into the summer of 2021.
Read our other posts in the Glassnode series:
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