BTC held on crypto exchanges has fallen to 2 million bitcoin, the lowest level since January 2018

The number of bitcoin (BTC) held at addresses tied to centralized exchanges has fallen to its lowest level in more than five years, in part due to growing market maturity.

The so-called foreign exchange reserve fell 4% this month to 2 million BTC ($54.5 billion), the lowest since early January 2018, according to on-chain data analysis service CryptoQuant.

The decline represents both positive and negative developments, including the rising popularity of services like crypto custodian Copper’s ClearLoop, which allows users to trade without transferring funds to centralized exchanges.

“This reflects in part increased demand for services like Copper’s Clearloop, which require a minimum of coins to be posted to exchanges. This is a natural evolution of the crypto market where exchanges have to operate with lower balances,” said Markus Thielen. Head of Research and Strategy at Matrixport. “Over time, this will result in cryptocurrency exchanges becoming less relevant and exchanges may need to find new business models to keep their profitability high.”

Ever since Sam Bankman-Fried’s exchange, FTX, went bust in November last year, investors have increasingly preferred to keep coins off centralized exchanges. From what we now know, FTX, formerly the world’s third largest exchange by trading volume, has been shuffling user funds, which has hurt investor confidence.

According to Thielen, the dwindling foreign exchange balance is responsible for this.

“FTX leadership’s abuse of client funds has reminded investors of the importance of self-custody,” Thielen told CoinDesk.

PricewaterhouseCoopers’ annual global crypto hedge fund report, released last month, showed that most industry players now favor multiple forms of custody, with “just 9% of respondents leaving coins exclusively on exchanges.”

Market-neutral long-only discretionary, long/short quantitative and long/short discretionary strategies predominantly favor third-party custodians. Among the four funds with a long-only strategy, the fewest hold coins on exchanges, both in mixed and segregated accounts.

“It appears that after the events of the last year, the overwhelming majority of crypto hedge funds are trying to mitigate risk as much as possible by only keeping assets on the exchange that are necessary for day-to-day trading,” it reads in the report.

One interpretation of a dwindling FX balance is that it suggests investors are holding the coins directly for long-term holding in anticipation of a price surge. In other words, it shows investors’ confidence in the cryptocurrency’s long-term prospects. According to Thielen, this bullish interpretation is still valid.

“After the price declines in 2022, investors are taking a buy-and-hold approach to investing,” he said.

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