Ethereum Exchange Balances: the Migration from Centralised to Decentralised Platforms

The amount of ETH held on exchanges has fallen by 33% to 20.9 million ($33 billion) in the six months since 26 March, data from Nansen shows.?

This means the level of ETH held on exchanges is at/near all time lows despite muted trading volumes and stagnant price activity. In the last six months, the price of 1 ETH has barely moved, and today stands at $1,585. Ether volatility — the amount that prices tend to swing on a daily basis — is also near all time lows, according to the T3 ETHVol Index.??

When ETH is moved to exchanges from user wallets (exchange inflows), it is normally taken as a bearish signal, as it indicates users are intending to sell or swap their ETH for other assets. Investors and traders have easy access to order books on exchanges that are not usually available on self-custody wallets.?

This is not the case currently, with outflows from exchanges only exceeding inflows on 27 out of the last 184 days.

By contrast, when ETH is moved off-exchange to user wallets (exchange outflows), it is treated as a bullish signal, indicating users are looking to self-custody and stake their ETH for yield through decentralised platforms such as Lido or Rocketpool.?

These indicators should be taken with a pinch of salt, however, because some exchanges also offer staking services. Coinbase, for example, is the second largest ETH staker, with 10.86% of the ETH staking market share, according to Dune Analytics.?

Those same analytics show that over 700,000 ETH (worth $1.1bn) has been moved into Lido’s staking service in the last 30 days alone. Coinbase’s staking service has seen 73,358 ETH added, worth $116m.?

So, two things are happening here at the same time. More users are moving ETH from their wallets into decentralised staking services, as well as moving more ETH into Coinbase’s staking programme.???

Since the Shapella upgrade in April that allowed users to realise their ETH yield gains, staking has dramatically increased on the network, from 19.6 million ETH to 27 million ETH, or around 21% of total current supply.?

This could indicate two things. The first is that holders are unwilling to sell their ETH as they expect the asset to outperform other asset classes in the coming year. Multiple positive catalysts are on the horizon, such as interest rate cuts leading to more risk-on appetite, the possibility of a US Ethereum spot ETF being approved by the SEC, and the introduction of clearer policy regarding crypto regulation in the US after the 2024 presidential election.?

A recent Coinbase survey found that 55% of the electorate in US swing are less likely to vote for a presidential candidate that expresses anti-crypto views in 2024. This, along with BlackRock’s move into crypto ETFs, suggests political and media rhetoric, along with digital asset legislation, could become more favourable than it ever has been before.

A second reason for consistent outflows from exchanges and toward self-custody could be that market participants are losing faith in exchanges generally, or finding higher yields and better returns through decentralised platforms.

Coinbase’s average monthly trading volume has fallen by more than 50% since the start of the year while trading volume on Binance US has dropped by 97% within the same timeframe.

After the collapse of FTX almost a year ago, market participants have been increasingly concerned whether exchanges can remain solvent in the wake of a large volume of withdrawal orders.

Ongoing regulatory battles for the likes of Coinbase, Kraken, and Binance’s US arm have only added to this sentiment.

The 20.9 million ETH held on exchanges represents 17% of Ethereum’s circulating supply. Coinbase holds 7.3 million of all ETH custodied by exchanges while Binance comes in second with 4 million. The remainder is divided between a few large players including Bitfinex, Kraken, and OKX.

Earlier this year, Kraken was forced to shut down its staking service for US clients and pay the SEC a $30m fine; thereby denying the exchange another source of revenue by acting as a validator and taking a commission from would-be stakers on its platform. Gemini had to do the same in January in light of poor market conditions and bruised investor confidence in the exchange.?

With more ETH exiting exchanges every day, one possible conclusion is that investors are in no hurry to liquidate their ETH positions and are ready to hold for the long-term.

Crypto exchanges are one of the cruxes of the digital asset ecosystem as they help connect retail and institutional buyers and sellers almost instantly for minimal fees, but they are still largely unregulated entities some of the most high-profile hacks of the last 5 years have been associated with exchange wallets that were either inadequately secured or co-mingled customer funds: such as Mt Gox, CoinCheck, QuadrigaCX and most recently Huobi.?

This is in direct contrast to digital asset management firms like ETC Group that offer exposure to cryptocurrencies through ETPs, that are fully-collateralized by the underlying asset, and trade on regulated exchanges around Europe like Deutsche B?rse Xetra.?

ETC Group’s Physical Ethereum ETP (Ticker: ZETH) is 100% fully backed by Ethereum and offers investors exposure to the digital asset without taking on the risks traditionally associated with crypto exchanges. The assets are held in cold storage with whitelisted custodians and are fully insured against bankruptcy.