Binance, Coinbase Bitcoin Reserves Falling Rapidly, Is This Bullish?

According to CryptoQuant’s May 10 data, Bitcoin reserves in centralized exchanges such as Binance and Coinbase experienced a significant decline in Q4 2022. Reserves remained stable in April despite prices rising from $20,000 to $31,000 during that period.

Exchange Bitcoin reserves are shrinking rapidly

Bitcoin exchange “reserves” are a metric that tracks the amount of BTC held by centralized exchanges at any given time. Usually, the interaction between coin holders and exchanges can be used to gauge sentiment and their price expectation for the coin within a short period of time.

An example of reserves falling is when there is a sudden outflow from stock exchanges. This may indicate that users are optimistic and store their assets in non-custodial wallets. However, it is important to note that this is not always the cause of outflows. They can also be caused by fundamental factors such as hacks or regulatory concerns – as recently seen with Binance.

Conversely, Bitcoin supply to exchanges can cause the ramp’s reserves to increase. Still, this is interpreted as bearish since holders can quickly liquidate their assets for cash or stablecoins.

With falling Bitcoin reserves across centralized exchanges, it could mean traders expect prices to rise shortly. In Q4 2022, the total Bitcoin exchange reserve in all tracked ramps fell sharply, especially in November 2022. This coincided with the collapse of FTX and questions that arose about the stability of Binance and other centralized exchanges.

Binance, the world’s largest cryptocurrency exchange, prompted other platforms to publish proof-of-reserve statements to quell fears and restore confidence. Although reserves have stabilised, there was a marked drop at the end of March 2023.

Then, the bankruptcy of Silicon Valley Bank (SVB) and the closure of Signature Bank, banks that served crypto projects, including Circle, the issuer of USDC, appeared to have triggered coin flow. From March 20 to early April, the Bitcoin exchange reserve fell from around 2.2 million to 2.1 million.

Will BTC rally?

The overall trend for Bitcoin exchange reserves remains negative, and prices are relatively firm, trading below $31,000.

While this correlation between rising prices and falling currency reserves remains valid, it is yet to be seen whether regulatory actions against crypto exchanges could cause a divergence.

Binance is reportedly being investigated by several US agencies, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

The CFTC alleges that Binance, the world’s largest exchange, violated trading laws in the country. Whether charges will be brought will still be decided during the writing.

Any official fee could undermine user confidence in the exchange, possibly triggering more outflows and lowering BTC reserves.

Feature image from Canva, chart from TradingView