New Bitcoin analysis raised doubts among experts

Data from analytics platforms show the lowest number of bitcoins on centralized exchanges since 2018. What could this mean, and how reliable is the blockchain researchers’ data

Onchain metrics are blockchain characteristics used in fundamental analysis of cryptocurrencies. It is difficult to collect this information on your own: you have to install special software and then export and analyze a large amount of data. A simpler solution is to use information from sites specifically designed to collect and process blockchain data. For example, cryptocurrency onchain analysis on platforms like Glassnode, CoinMarketCap, Santiment, Coinmetrics, CoinGecko and many others.

One frequently used onchain metric is the aggregate balance of bitcoin on centralized exchanges. According to analytics platform Santiment, which publishes metrics for about 2,000 cryptocurrencies, that figure has fallen by more than 40 percent since March of this year and has fallen to its lowest since November 2018.

Experts told us what the decline in bitcoin on centralized platforms can tell us about, and how reliable the data from onchain analysts is.

An indirect indicator

Such a serious reduction in reserves on centralized exchanges can indeed be considered a significant positive signal for the market in the long term, said Nikita Zuborev, senior analyst at Bestchange.ru. According to him, despite the fact that much of the trading is done with open-ended futures, that is, without the actual participation of coins, yet the current reserves of the largest exchanges may indirectly indicate the phase of the market. When reserves decline, it is reasonable to assume positive expectations of large investors, the expert believes: they usually withdraw funds from exchanges, not planning to get rid of assets and expect an increase.

Zuborev explained that in terms of blockchain analysis, the evaluation of onchain parameters may be one of the factors indicating a trend reversal. This information should not be ignored, he believes.

“Typically, large withdrawals are associated with large over-the-counter transactions, meaning they indirectly show positive expectations of institutional or large private investors,” the analyst said.

Inaccurate information

The main problem researchers have with such estimates is that wallets are far from always uniquely identifiable, Zuborev reminded. Whether the movement of funds was a full-fledged withdrawal for an OTC transaction or a simple transfer to a new unidentified cryptocurrency wallet for “cold storage” is unclear. Therefore, it is worth being skeptical of the data of onchain research, the expert believes.

Aaron Chomsky, head of ICB Fund’s investment department, holds the same opinion. He noted that the reliability of such information raises big questions. Onchain analytics services cannot guarantee 100% accuracy, which is often indicated in the disclaimer, the expert said.

He explained that the complexity of the process lies in the correct partitioning of wallets: often the information about the address belonging to a particular exchange or other major player appears late. As a consequence, many new addresses may not be taken into account, the specialist said.

He noted, that’s why one should not trust various “whale” transaction trackers, like Uniwhales, because many intrachange transactions may look like interaction of an exchange address with an unknown purse. That’s how theories arise that some whale brought a large volume of coins to the site to sell or took them out for the purpose of long-term holding, Chomsky explained.

The expert believes that one should not draw conclusions based on such data. Exchanges may have many purses, including for OTC trading: as strange as it may sound, but many cryptocurrency exchanges provide such a service, the expert said.

It is worth keeping in mind that centralized platforms are still the main sources of liquidity for speculation, and this is the main real way of using cryptocurrency at the moment, said Khosmky. According to him, it is possible to talk about an increase in the number of people willing to accumulate coins for a long time outside of exchanges, but most likely due to the complexity of the digital infrastructure it is no longer possible to track balances of exchanges relying only on outdated wallet data.