Exchange Reserves - The Barometer of Supply
What are Exchange Reserves
Exchange Reserves refers to the total amount of coins held in all exchange wallets. While exchange flows look at "how much came in and went out today," exchange reserves look at "how much is currently stored on exchanges."
Coins on exchanges are immediately sellable liquid supply. When this amount decreases, the supply that can enter the market decreases, which is positive from a supply perspective.
Why Exchange Reserves Matter
Supply-Demand Dynamics
Bitcoin's total supply is limited to 21 million. When the amount held on exchanges decreases, liquid supply decreases, creating greater price appreciation pressure for the same level of demand.
- Decreasing exchange reserves + maintaining/increasing demand: Supply squeeze. Potential for price increase.
- Increasing exchange reserves + decreasing demand: Increased selling supply. Potential for price decrease.
Measure of Available Selling Supply
Exchange reserves are equivalent to the upper limit of selling supply that can immediately enter the market. When reserves decrease, even if large-scale selling occurs, its magnitude is limited.
Bitcoin Exchange Reserves Trends
Bitcoin exchange reserves are closely connected to market cycles.
Historical Trends
| Period | Reserve Trend | Market Condition |
|---|---|---|
| 2017-2018 | Reserves increasing | ICO mania, active speculative buying/selling |
| 2018-2019 | Reserves stagnant | Bear market, decreased activity |
| 2020-2021 | Reserves sharply declining | Institutional buying, increased self-custody |
| 2022 | Reserves temporarily increasing | Pre-FTX anxiety sentiment |
| 2023-Present | Reserves declining again | Accumulation phase, ETF approval |
The decline in exchange reserves that began after March 2020 is one of the most notable on-chain changes in Bitcoin's history. It's the combined result of institutional investor entry, the spread of self-custody culture, and Bitcoin ETFs.
Supply Squeeze Scenario
If demand surges while exchange reserves are continuously declining, a "supply squeeze" can occur. When supply available for sale is limited but buying demand is high, prices can surge rapidly.
Ethereum Exchange Reserves
Ethereum's exchange reserves have different dynamics at play compared to Bitcoin.
Impact of Staking
After Ethereum's transition to Proof of Stake (PoS) with Ethereum 2.0, a significant amount of ETH is locked in staking. Staked ETH contributes to decreasing exchange reserves by leaving exchanges, but this is for yield generation purposes, not selling intentions.
DeFi Lockups
ETH deposited in DeFi protocols also leaves exchange reserves. While increasing TVL (Total Value Locked) decreases exchange reserves, since ETH can quickly be withdrawn from DeFi and sent to exchanges for sale, it has higher liquidity than Bitcoin cold storage.
Liquid Supply and Illiquid Supply
For more sophisticated exchange reserve analysis, Bitcoin supply can be classified into three categories.
Supply Classification
| Classification | Definition | Characteristics |
|---|---|---|
| Liquid Supply | Coins on exchanges or frequently moving | Immediately sellable |
| Illiquid Supply | Coins that haven't moved for extended periods | Low selling probability |
| Lost Supply | Inaccessible coins (lost keys, etc.) | Permanently non-circulating |
According to Glassnode estimates, approximately 78% or more of Bitcoin's total supply is illiquid. The liquid supply actually circulating in the market is only a fraction of the total.
Meaning of Increasing Illiquid Supply
Increasing illiquid supply means long-term holders (HODLers) are increasing. Since they don't react to short-term price fluctuations, higher illiquid supply structurally weakens the market's selling pressure.
Exchange-by-Exchange Reserve Differences
Judging Exchange Health
Changes in individual exchange reserves can be an indirect indicator for assessing that exchange's health.
- Sharp reserve decline: Users may be withdrawing due to lack of trust in the exchange. A pattern observed just before the FTX collapse.
- Reserves stable or increasing: Users trust the exchange, or new funds are flowing in.
Lessons from the 2022 FTX Collapse
The FTX collapse dramatically demonstrated the importance of exchange reserve analysis. When it was revealed that FTX's actual reserves were less than customer assets, panic spread across the entire market. Since then, Proof of Reserves has become an industry standard.
Combining with Other Indicators
Exchange Reserves + Price
| Exchange Reserves | Price | Interpretation |
|---|---|---|
| Declining | Rising | Very bullish. Accumulation and price rise occurring simultaneously |
| Declining | Falling | Smart money accumulation. Medium to long-term bullish signal |
| Increasing | Rising | Increasing profit-taking supply. Watch for top |
| Increasing | Falling | Bearish confirmed. Selling pressure materializing |
Exchange Reserves + HODL Waves
When exchange reserves are decreasing while the proportion of long-term held coins in HODL Waves is increasing, it's a strong accumulation signal meaning coins are moving to "strong hands."
Cautions
Limitations of Exchange Wallet Tracking
- When exchanges create new wallets or change their structure, data can be temporarily distorted.
- Decentralized exchange (DEX) volumes are often not included.
- Some exchanges store customer assets with separate custody providers, which may not be captured in exchange reserves.
Impact of Bitcoin ETFs
Since spot Bitcoin ETF approval, large amounts of Bitcoin have been moving to ETF custody wallets. This volume leaves exchanges, but it's different in nature from traditional "self-custody." Since selling through ETFs is possible, it's difficult to consider this completely illiquid supply.
Summary
Exchange reserves are an indicator showing the size of liquid supply that can immediately enter the market. A sustained decline in reserves is a bullish signal from a supply perspective, and when combined with increasing demand, it can lead to a supply squeeze. Observing alongside Bitcoin's liquid/illiquid supply classification allows for more accurate assessment of the market's structural health.
Next article: HODL Waves and Coin Age - What Holding Period Tells Us