Conventional wisdom suggests that buyers at large quantities of bitcoin exchange coins accumulate coins in their cold rooms, presumably forever. The reality is more complicated than that, and bitcoin outflow in 2021 has much more to do with another important digital asset: steel coins.
But first, how we got here: the crypto industry is still not happy about FinCEN’s proposal to require crypto exchanges to collect data on both sides of any outflow transactions. Now, crypto advocates have a civil liberties group taking their side in commenting on the proposal. It made me wonder how much money are we talking about now?
The table above shows the estimated nominal value of bitcoin flowing out of the wallets, summed up per month. The actual number is probably larger. In particular, Coinbase goes further than most wallets in disguising its Bitcoin addresses, which is why the largest US accessible exchange by volume is almost certainly undercut here.
However, $ 60 billion a month is nothing to sneeze at. It is no wonder that regulators are paying attention to this flow.
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A large part of the increase in outflows is due to bitcoin’s extraordinary Q1 price run. It was a record first quarter for the orange coin. Historically, for whatever reason, the first quarter was weak, with negative returns in five of the past seven years, according to CoinDesk Research. In 2021, bitcoin rose 103% in the quarter.
However, this is not the whole story. Last week, another record was set: a one-day high-water mark in bitcoin outflow, with 1,365 BTC transferred within 24 hours of the exchange.
Some interpret these transfers clumsily: bitcoiners move their exchange bitcoin into cold storage. Crypto Analyst Willy Woo calls these hodlers ‘Rick Astleys’, since the British pop singer’s single ‘Never Gonna Give You Up’ from 1987, a good description of their feelings about bitcoin. But as I said on CoinDesk TVs All about Bitcoin show last Friday, it’s possible they’re Stevie Wonders. This means: they are a part-time lover (s). ‘
This is what I mean by this: one of the underlying market dynamics of the last three years has been the rise of steel coins. Tether (USDT) in particular has replaced bitcoin as the dominant quote currency of crypto altcoin trading. What this means is that if I want to use crypto to buy crypto on a stock exchange, I am much more likely to do so in tether or, to a limited extent, USD currency (USDC), the dollar-tied stable coin of Circle.
What we are looking at here are currency volumes, the volume of markets priced in bitcoin, and the top two stable currencies for the four best altcoins: ether, cardano, chainlink and stellar lumen, on three wallets included in TradeBlock’s bitcoin XBX index, plus Binance. So this is an example of the market, but an important one. (TradeBlock is owned and operated by CoinDesk, and the XBX index is sourced from the most liquid exchanges available to U.S. investors, and I use Binance as a trusted proxy for the rest of the world.)
As the chart shows, a pinch took place in early 2020, with stable coins already replacing bitcoin as the dominant crypto-currency. Since then, tether and USDC have continued to eat up a growing share of the exchange rate, replacing bitcoin more and more. The quote volume of Bitcoin is now dropping to 12% against the two largest stable coins. And increasing reflections of bitcoin outflows reflect the trend just as much as anything else: as the volume moves from markets quoted in bitcoin, to markets quoted in tether, the stock market balance reflects the move.
In other words, when it comes to the popular narrative of bitcoin outflows as a bullish signal of hodler activity, I think it’s a story the Doobie Brothers came up with: it’s “What a Fool Believes.” I tend to lean more towards Tina Turner on this benchmark and wonder, “What does love have to do?” My advice to investors is to stay like Daryl Hall and John Oates, and keep a close eye on their “Private Eyes”.
After trading in a band between $ 50,000 and $ 60,000 for more than a month, bitcoin seems likely to make a breakthrough every day. Be wary of narratives based on tea leaves in the blockchain data.