Conventional evidence suggests that if large amounts of Bitcoin are withdrawn from circulation, the Hodlers are likely to keep coins in their cold stores forever. The reality is more complicated, and the bitcoin outflows in 2021 have a lot more to do with another important digital asset: stablecoins.
But first, how we got here: The crypto industry is still not pleased with FinCEN’s proposal to require a crypto exchange to collect data on both sides of outflow transactions. Now, crypto advocates have a civil liberties group that will take their side in comments on the proposal. That asked me how much money we’re talking about.
Value of bitcoin flowing out of wallets
The graph above shows the estimated nominal value of Bitcoin flowing out of wallets, summed up by month. The real number is likely larger. In particular, Coinbase goes to greater lengths than most exchanges to disguise its Bitcoin addresses, and therefore the largest by volume accessible exchange in the US is almost certainly undercounted here.
However, $ 60 billion a month is no reason to sneeze. No wonder regulators are paying attention to these flows.
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Much of the surge in outflows is due to Bitcoin’s extraordinary price spike in the first quarter. It was a record in the first quarter for the orange coin. Historically, the first quarter has been weak for some reason, with negative returns for five of the last seven years, according to CoinDesk Research. In 2021, Bitcoin was up 103% from the quarter.
However, that is not the whole story. There was another record last week: a one-day high water mark in Bitcoin-denominated outflows, with 1,365 BTC being transferred from exchanges within 24 hours.
Some interpret these transfers as bullish: Bitcoiners are moving their exchange Bitcoin to a cold store. The crypto analyst Willy Woo calls these hodlers “Rick Astleys” because the British pop singer’s 1987 single “Never Gonna Give You Up” aptly describes her feelings about Bitcoin. But as I said on CoinDesk TV’s All About Bitcoin show last Friday, it’s possible it’s Stevie Wonders. That is, they are “part-time lovers”.
By that I mean this: One of the underlying market dynamics over the past three years has been the rise of stablecoins. Tether (USDT) in particular has replaced Bitcoin as the dominant quote currency in crypto altcoin trading. That said, if I want to use crypto to buy crypto on an exchange, I’m much more likely to do so on the leash or, to a limited extent, in the USD coin (USDC), Circle’s dollar-linked stablecoin.
Note currency volume: stablecoins vs. bitcoin
What we see here is the quote currency volume, the volume of the Bitcoin markets, and the two best stablecoins for the four best altcoins: Ether, Cardano, Chainlink and Stellar Lumen on three exchanges included in TradeBlock’s Bitcoin XBX index, plus Binance. So this is a sample of the market, but a significant one. (TradeBlock is owned and operated by CoinDesk, and its XBX index is drawn from the most liquid exchanges available to US investors, and I use Binance as a reliable proxy for the rest of the world.)
As the graphic shows, there was a flipping at the beginning of 2020, with stablecoins already replacing Bitcoin as the dominant crypto quote currency. Since then, Tether and USDC have continued to eat up a growing portion of the quota currency volume, increasingly replacing Bitcoin. Bitcoin’s quote volume has now dropped to 12% versus the two largest stablecoins. Increasing Bitcoin outflows reflect this trend as much as everything else: as volume moves from markets listed in Bitcoin to markets listed in Tether, the change exchanges will reflect that movement.
In other words, when it comes to the popular narrative of Bitcoin outflows as a bullish signal for Hodler activity, I think this is a story the Doobie Brothers came up with: it’s “What a Fool Believes”. I tend to lean towards Tina Turner for this metric and ask myself, “What does love have to do with it?” My advice to investors would be to stay like Daryl Hall & John Oates and have their “private eyes” watch this market closely.
After trading in a band between $ 50,000 and $ 60,000 for more than a month, Bitcoin seems more likely to break out every day. Be careful of narratives based on tea leaves in the blockchain data.