NO, BITCOIN WITHDRAWALS FROM EXCHANGES ARE NOT INHERENTLY BULLISH FOR CRYPTO

On August 29, the amount of Bitcoin (BTC) held within exchanges suffered a decrease, reaching its lowest point since January 2018. This was the sixth month in a row that this record had been broken. Even though this change could be caused by several variables, specialists who study the data from blockchains typically view the shift as a positive indicator. Traders are now wondering what might have been the cause of Bitcoin's inability to break above $31,000. This price action doesn't correlate with their opinion that fewer coins on exchanges are bullish for the price of BTC. Therefore, they are questioning what might have been the cause.

The assumption that a bullish mood is indicated when traders withdraw their coins from controlled exchanges is the source of the perspective that the amount of Bitcoin held at centralized exchanges is decreasing. This is often connected to a tactic that entails keeping assets under control for an extended period.

Despite the absence of evidence that may definitively support these hypotheses, they continue to be perpetuated, most likely due to historical precedence. Nevertheless, regardless of the frequency with which such instances occur, it is still difficult to pinpoint the exact reason for these events and establish a connection between them. While making a deposit of fiat currency before purchasing on an exchange could be required in some cases, the opposite is only sometimes the case.

DATA DOES NOT SHOW A RELATIONSHIP BETWEEN ON-CHAIN METRICS AND BITCOIN PRICE ACTION

Since the middle of May, the data from blockchain transactions have shown a constant decrease in the amount of Bitcoin deposited on exchanges. Except for a brief J forum in the middle of June that coincided with BlackRock's filing of an application for a spot exchange-traded fund, the price trajectory of Bitcoin does not present any meaningful signals of a bullish upswing. This is the case even with BlackRock recently creating a spot exchange-traded fund.

It is important to note that there was a rise in deposits on exchanges throughout the time, encompassing a 30% surge from March 12 to March 19, in contrast to what the forecasts of on-chain analysis had shown would happen. Despite this contradiction, only some examples of influential people discuss the flaws in these long-standing myths. One possible explanation for this is the ease with which deposits made on exchanges might be linked to an increased propensity for selling.

It is dangerous to base one's understanding of market trends only on on-chain analysis because all indicators, including on-chain analysis, are subject to occasional errors. However, extensive evidence does not support the concept that exchange withdrawals are principally intended for transfer to cold storage. It is primarily a claim that exists in the form of a hypothesis. For instance, a lower short-term selling intent is not one of the three plausible factors that explain decreasing deposits on exchanges. There are also two other possible reasons.

BITCOIN HOLDERS HAVE MOVED TO A SAFE CUSTODY SOLUTION

The rising confidence in custodial solutions is the primary reason Bitcoin withdrawals from exchanges do not necessarily signal a reduction in short-term selling pressure. This suggests that the owner may have obtained the coins some time ago but is now comfortable parting with them. Notable custodians such as Prime Trust surprised investors by filing for Chapter 11 bankruptcy in Delaware due to insufficient customer cash. Moreover, in June, hackers stole a whopping $35 million worth of cryptocurrency from users of the Atomic Wallet. Investors may have been apprehensive about commencing withdrawals from exchanges because of the widespread distrust in custodial solutions.

INVESTORS LOSE FAITH IN CENTRALIZED EXCHANGES

The Securities and Exchange Commission filed a lawsuit against Binance on June 5, alleging the sale of unregistered securities. The commission shifted its attention to Coinbase on similar grounds a day after the Binance case, claiming that significant altcoins the exchange provided fulfill the securities' threshold. To make matters worse, a Semafor report from August 2 revealed that US Justice Department officials raised concerns about a Binance indictment sparking a run on the exchange, similar to what happened with FTX in November 2022. These regulatory efforts may have influenced users' decisions to keep their deposited coins away from businesses, regardless of their intention to sell, making withdrawals unconnected to price movements.

DECREASING BUYER INTEREST COULD REVERSE THE TENDENCY

The demand side of the equation has run into its own difficulties, even if one assumes that the majority of Bitcoin leaving exchanges is indeed headed to cold wallets, meaning holders have a reduced incentive to engage in short-term selling. For example, on Google Trends, queries for "buy Bitcoin" have not recovered to even 50% of their two-year high.

Comparatively, Bitcoin's spot trading volume in August averaged a meager $7 billion, less than half the amount seen from January through March.

Consequently, the numbers highlight dwindling interest from purchasers, which reflects Bitcoin's need for more positive momentum. This tendency lines up with the falling volume of coin deposits at exchanges. Consequently, the impact on the supply-demand balance is modest, even though exchange deposits have plummeted since 2018.

However, there is no support for this position in terms of price dynamics, as the shift may be reflective of a more considerable reluctance to actively trade the asset, even if on-chain metric analysis lends some credence to the idea that coins are shifting from the custody of short-term holders to those of long-term holders.