Bitcoin’s shrinking exchange supply loses some of its bullish influence

Santiment reported that Bitcoin’s supply held on cryptocurrency exchanges has dropped to its lowest level since 2017, while Ethereum’s exchange reserves have reached their lowest point since 2015. The firm said the decline does not automatically mean prices will rise but could help prepare the market for the next major crypto uptrend.

One of Bitcoin’s longest-standing bullish indicators continues to attract attention, even though its impact is not as strong as it was in previous market cycles.

For years, investors have viewed declining BTC balances on centralized exchanges as a positive signal. The idea is that when holders move coins into private wallets, fewer assets remain available for immediate selling, reducing potential sell pressure and creating a more favorable supply environment.

This interpretation has been widely accepted since Bitcoin’s early years and remains a popular market narrative, according to blockchain analytics company Santiment.

“Historically, sustained declines in exchange-held supply have often appeared ahead of extended bull market cycles,” said Mark Zalan, CEO of GoMining, a tokenized retail mining platform. However, he cautioned that predicting the exact beginning of a new bull run is difficult, saying those who claim to know the timing with certainty are making assumptions rather than accurate forecasts.

However, the exchange supply metric has become less reliable as the market structure has changed. Bitcoin reserves on exchanges have remained unusually low for an extended period, yet BTC has continued trading well below its previous peak.

Some analysts believe the indicator no longer provides the same insight because it does not account for the growth of institutional custody, ETFs, and other forms of Bitcoin ownership.

“Low exchange balances were once considered a clear bullish indicator,” said Eneko Knorr, CEO of Stabolut. “But we have seen extremely limited exchange supply for more than a year. The market has matured, and much of that crypto has simply shifted elsewhere, including DeFi platforms, staking services, yield-generating strategies, and institutional custody solutions.”

Santiment recently highlighted on X that Bitcoin and Ethereum exchange supplies have fallen to historic lows, describing the trend as one of crypto’s strongest long-term indicators. The firm estimates that Bitcoin held on exchanges accounts for about 6.6% of circulating supply, while Ethereum’s exchange supply represents roughly 4.3%.

“Bitcoin and Ethereum are showing one of crypto’s most positive long-term trends: coins are moving away from exchanges,” Santiment said, explaining that fewer coins are immediately available for selling even after months of market volatility.

Since Bitcoin and Ethereum together represent nearly 66% of the overall cryptocurrency market, Santiment believes declining exchange balances could contribute to the setup for a future prolonged bull market. However, the firm noted that the market has not fully entered that phase yet.

Bitcoin ownership is becoming more complex

The meaning of declining exchange reserves has changed as the crypto ecosystem has expanded.

Bitcoin leaving exchanges does not always mean it has moved into long-term cold storage. Some BTC is converted into wrapped assets like WBTC and deployed across decentralized finance platforms, where it remains active through trading, lending, and collateral applications.

Spot Bitcoin ETFs have introduced another layer of complexity. When investors buy ETF shares, issuers acquire Bitcoin through exchanges or OTC markets and place those holdings with institutional custodians.

Although these coins disappear from exchange reserve data, ETF shares continue to trade on traditional markets, providing investors with a liquid way to gain exposure to Bitcoin.

The exchange balance metric does not fully capture this growing financialization of Bitcoin. This limitation has become more significant as ETF adoption increases. Coinglass data shows U.S. spot Bitcoin ETFs hold approximately $73 billion in assets, representing more than 641,400 BTC. Ethereum ETFs hold about $13.7 billion, representing roughly 7.7 million ETH.

“The bigger shift is that this metric reflects the transition away from the traditional exchange custody model,” said Ben Nadareski, CEO of Solstice. “The important factor is not just that assets are leaving exchanges, but where those assets are moving.”

Nadareski explained that Bitcoin is increasingly flowing into two major areas: regulated institutional custody and productive on-chain financial applications.

The assumption that falling exchange balances always lead to price rallies is also not guaranteed. During 2022, exchange reserves remained low even as Bitcoin experienced a severe market downturn.

Long-term Bitcoin accumulation continues

Although exchange supply may have become a less reliable market signal, Bitcoin accumulation among institutions, companies, and long-term holders remains strong.

“More than 130 public companies now hold Bitcoin on their balance sheets, while spot ETFs continue moving BTC into regulated custody,” Zalan said.

Bitcoin Treasuries data shows public companies hold approximately 1.26 million BTC, private companies hold around 281,752 BTC, governments hold about 649,954 BTC, and DeFi protocols hold nearly 369,595 BTC. ETFs and exchanges collectively hold around 1.62 million BTC.

The data also shows that treasury companies hold roughly 7.25 million ETH.

When combined with nearly 7 million Bitcoin stored in dormant wallets, almost 11.2 million BTC is currently outside active trading circulation. That accounts for approximately 56.5% of Bitcoin’s circulating supply of about 20.05 million coins.