Cryptocurrency analysts on X (the social media platform formerly known as Twitter) and YouTube interviews have been buzzing about Bitcoin’s trend away from centralized exchanges.

On Aug. 29, the amount of Bitcoin (BTC) held on exchanges fell, reaching its lowest point since January 2018. While a variety of factors could have contributed to the move, experts analyzing blockchain data generally interpret the change as a positive indicator. Traders are now questioning what is preventing Bitcoin from breaching $31,000, as this price action is at odds with their view that fewer tokens on exchanges are in favor of BTC price.

The perception of bitcoin holdings on centralized exchanges falling stems from the notion that when traders withdraw bitcoin, it signals bullish sentiment. This is often associated with strategies for long-term self-custody of assets.

Although these hypotheses lack hard evidence, their persistence may stem from historical precedent. However, regardless of the frequency of such events, establishing a relationship between these events and a specific cause remains elusive. While selling on an exchange may require a prior deposit of fiat currency, the reverse is not necessarily the case.

Data Fails to Show Correlation Between On-Chain Metrics and Bitcoin Price Action

Blockchain transaction data shows that Bitcoin deposits on exchanges have continued to decline since mid-May. Meanwhile, Bitcoin’s price trajectory has failed to provide substantial signs of a bullish uptick, save for a brief spike in mid-June that coincided with BlackRock’s filing for a spot ETF.

Bitcoin gross traded net position change (in BTC). Source: Glassnode

Notably, deposits on exchanges increased during the 30% surge from March 12 to March 19, in stark contrast to on-chain analytics predictions. Despite this paradox, there are few examples of influencers addressing the weaknesses of these enduring myths. This could be attributed to the simplicity of linking exchange deposits to an increased propensity to sell.

Of course, all metrics are prone to occasional inaccuracies, and it is unwise to rely solely on on-chain analysis to determine market trends. However, the idea that withdrawals from exchanges are primarily used for transfers to cold storage has little substantive basis and exists largely as a hypothetical proposition. For example, there are three possible reasons for the decline in exchange deposits unrelated to a weakening of short-term willingness to sell.

Bitcoin Holders Turn to Reliable Custody Solutions

The withdrawal of Bitcoin from exchanges does not necessarily indicate a decrease in short-term selling pressure, the most important explanation is growing trust in custody solutions. This means that the coins may have been acquired in the past and until recently the owner felt comfortable transferring them. Notably, reputable custodians such as Prime Trust have taken investors by surprise by seeking Chapter 11 bankruptcy protection in Delaware due to client fund shortfalls. Additionally, in June, a staggering amount of around $35 million was stolen from Atomic Wallet users’ crypto assets. A general lack of trust in custodial solutions may account for the caution investors take before withdrawing funds from exchanges.

Investors lose confidence in centralized exchanges

On June 5, the SEC launched legal action against Binance, accusing Binance of issuing unregistered securities. The day after Binance’s lawsuit, the committee shifted its focus to Coinbase on similar grounds, arguing that the exchange’s offering of well-known altcoins met securities standards. To complicate matters further, a Semafor report on Aug. 2 revealed that U.S. Department of Justice officials expressed concern that Binance’s prosecution would trigger a run on the exchange, similar to the events surrounding FTX in November 2022. These regulatory actions may have influenced users’ decisions to keep their deposited tokens away from exchanges regardless of their intent to sell, making withdrawals independent of price fluctuations.

Falling buyer interest could offset the trend

Even if one assumes that most of the bitcoin leaving exchanges does go to cold wallets, meaning holders are less inclined to short-term sell, the demand side presents its own set of challenges. For example, searches for “buy bitcoin” on Google Trends have struggled to exceed 50% of their peak in the previous two years.

Google Trends searches for “buy bitcoin” worldwide.Source: Google

Likewise, bitcoin spot trading volumes averaged $7 billion per day in August, less than half of the trading activity observed between January and March.

Bitcoin Adjusted Daily Volume, USD. Source: Messari and Kaiko

As such, the data highlights waning buyer interest, which in turn reflects a lack of bullish momentum for Bitcoin. This parallel trend coincides with a decrease in the number of tokens deposited on exchanges. Thus, while exchange deposits for Bitcoin plummeted to 2018 levels, the impact on the supply-demand balance was negligible due to generally subdued trading activity.

Ultimately, while the analysis of on-chain metrics may provide fundamental support for the concept of a token transitioning to long-term holder holding, this view offers little support in terms of price dynamics, as this trend may reflect broader disparity. Willingness to actively trade tokens. assets.