Conventional wisdom suggests that when large amounts of bitcoins leave exchanges, hodlers are storing coins in their cold stores, probably forever. The reality is more complicated than that, and the bitcoin outflow in 2021 has much more to do with another important digital asset: stablecoins.
But first, how we got here: The crypto industry is still not happy with FinCEN’s proposal to require crypto exchanges to collect data on both sides of any outbound transactions. Now, crypto advocates have a group of civil liberties taking their side in comments on the proposal. It made me wonder: how much money are we talking about?
The graph above shows the estimated notional value of bitcoin coming out of the exchange portfolios, added up by month. The actual number is probably higher. Notably, Coinbase goes further than most exchanges to disguise their Bitcoin addresses, and therefore the largest accessible exchange in the U.S. in volume is almost certainly underestimated here.
However, $ 60 billion a month is not at all negligible. It is no wonder that regulators are paying attention to these flows.
You are reading Crypto Long & Short, a newsletter that takes a close look at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, he goes out every Sunday and offers a recap of the week – with insights and analysis – from the point of view of a professional investor. You can sign up here.
Much of the increase in outflows is due to the extraordinary bitcoin price race in the first quarter. It was a record first quarter for the orange currency. Historically, for whatever reason, the first quarter has been weak, with negative returns in five of the past seven years, according to CoinDesk Research. In 2021, bitcoin grew 103% in the quarter.
That is not the whole story, however. Last week saw another record: a single-day ceiling on bitcoin-denominated outflows, with 1,365 BTC transferred from exchanges over a 24-hour period.
Some interpret these transfers optimistically: bitcoiners moving their exchange bitcoin into cold storage. Crypto analyst Willy Woo calls these hodlers “Rick Astleys”, from the single from the British pop singer who topped the 1987 charts, “Never Gonna Give You Up”, appropriately describes his feelings about bitcoin. But as I said on CoinDesk TV’s All about Bitcoin show last Friday, it is possible that they are Stevie Wonders. That is, they are “part-time lovers (s)”.
Here’s what I mean by that: one of the underlying market dynamics of the past three years has been the rise of stablecoins. Tether (USDT), in particular, has replaced bitcoin as the dominant quote currency in the altcoin cryptocurrency trade. What that means is that when I want to use crypto to buy crypto on a stock exchange, it’s much more likely that I’m doing it in tether or, to some extent, USD (USDC) currency, the stable currency pegged to the US dollar. Circle.
What we are seeing here are the volume of currency quotes, the volume of markets with prices in bitcoin and the two main stablecoins for the four main altcoins: ether, cardano, chainlink and Stellar lumens, on three exchanges included in the XBX bitcoin index of TradeBlock, plus Binance. So, this is a sample of the market, but significant. (TradeBlock is owned and operated by CoinDesk, and its XBX index is obtained from the most liquid exchanges that are accessible to US investors, and I am using Binance as a reliable proxy for the rest of the world).
As the graph shows, in early 2020, a flippening took place, with stablecoins already replacing bitcoin as the dominant crypto quote currency. Since then, the tether and USDC have continued to consume an increasing share of the volume of the quoted currency, increasingly replacing bitcoin. Bitcoin’s quote volume has now dropped to 12% compared to the two largest stablecoins. And so, the increasing flows of bitcoin output reflect this trend as much as anything else: as the volume moves from bitcoin-quoted markets to tether-quoted markets, the foreign exchange portfolio balances reflect this movement.
In other words, when it comes to the popular narrative of bitcoin flows as a bullish sign of hodler activity, I think it’s a story invented by the Doobie Brothers: it’s “What a Fool Believes”. I tend to lean more towards Tina Turner on that metric, wondering, “What does love have to do with it”? My advice to investors is to stay like Daryl Hall and John Oates and keep your “private eyes” watching this market closely.
Having traded in a band between $ 50,000 and $ 60,000 for more than a month, bitcoin seems more and more likely to burst. Be careful with tea leaf-based narratives in the blockchain data.