Bitcoin’s shrinking exchange reserves lose some of their traditional bullish impact
Santiment reported that Bitcoin’s supply held on exchanges has fallen to its lowest level since 2017, while Ethereum’s exchange reserves have dropped to their lowest point since 2015. The analytics firm said the trend does not guarantee an immediate price rally but could help create the conditions for the next major crypto bull market.
One of Bitcoin’s oldest bullish indicators continues to attract attention online, although its influence has weakened compared with previous market cycles.
For years, analysts have viewed declining Bitcoin balances on centralized exchanges as a positive market signal. The logic was simple: when investors withdraw BTC into self-custody wallets, fewer coins remain available for immediate selling, potentially reducing sell-side pressure and supporting higher prices.
This exchange supply trend has historically been considered a reliable bullish indicator, and Santiment believes it still carries long-term significance.
“Historically, extended reductions in exchange-held supply have often occurred ahead of multi-quarter bull markets,” said Mark Zalan, CEO of GoMining, a tokenized retail mining platform. However, he cautioned that predicting the exact start of a bull cycle is impossible, noting that anyone claiming certainty is making a guess rather than a forecast.
However, the signal has become less convincing because exchange balances have stayed at historically low levels for months while Bitcoin remains significantly below its record high. Some market observers argue that the metric no longer reflects the full picture because it ignores the rapid growth of institutional custody and new investment products.
“Low exchange supply was once viewed as a clear bullish indicator,” said Eneko Knorr, CEO of Stabolut. “But supply has remained extremely low for more than a year. The crypto market has matured, and much of that Bitcoin has simply moved into other areas, including staking, DeFi platforms, yield strategies, and institutional storage.”
Santiment recently noted on X that Bitcoin and Ethereum exchange balances have reached historically low levels, describing the trend as one of crypto’s strongest long-term signals. The firm’s data shows Bitcoin on exchanges represents about 6.6% of total circulating supply, while Ethereum’s exchange-held supply stands near 4.3%.
“Bitcoin and Ethereum are showing one of crypto’s most encouraging long-term signals: coins are staying away from exchanges,” Santiment said, adding that fewer coins are immediately available for selling despite ongoing market volatility.
Since Bitcoin and Ethereum together represent nearly 66% of the total cryptocurrency market capitalization, Santiment believes reduced exchange supply could help support the foundation for a future sustained rally. However, the firm noted that the next bull cycle has not fully arrived yet.
Crypto’s market structure has changed
The meaning of declining exchange balances has evolved as the crypto ecosystem has expanded. Bitcoin leaving centralized exchanges does not always indicate that investors are storing coins in long-term cold wallets.
Some BTC is converted into wrapped assets such as WBTC and deployed across decentralized finance applications. This means Bitcoin may disappear from exchange data while remaining active within decentralized markets through trading, lending, or collateral use.
The rise of spot Bitcoin ETFs has also changed the landscape. When demand for ETFs increases, issuers purchase BTC from exchanges or over-the-counter markets and transfer the assets into institutional custody platforms.
Although these coins no longer appear in exchange reserve data, ETF shares continue trading on traditional stock exchanges, allowing investors to maintain liquid exposure to Bitcoin.
Critics argue that exchange balance data does not fully account for this growing financialization of Bitcoin. This has become increasingly important as ETF adoption expands. Coinglass data shows U.S. spot Bitcoin ETFs hold around $73 billion in net assets, representing more than 641,400 BTC. Ethereum ETFs hold approximately $13.7 billion, equivalent to about 7.7 million ETH.
“The overlooked trend is that this metric reflects the end of the traditional exchange-custody era,” said Ben Nadareski, CEO of Solstice. “The bigger question is not simply whether exchange balances are falling, but where those assets are moving.”
Nadareski said Bitcoin is increasingly flowing into two major areas: regulated institutional custody and productive on-chain financial activities.
The historical relationship between declining exchange balances and bull markets is also not absolute. In 2022, exchange supply remained relatively low even as Bitcoin suffered a major downturn.
Bitcoin accumulation remains a major trend
Despite the weaker reliability of the exchange reserve indicator, Bitcoin accumulation continues across different categories of investors.
“More than 130 public companies now hold Bitcoin on their balance sheets, and spot ETFs continue moving BTC into regulated custody,” Zalan said.
According to Bitcoin Treasuries data, public companies hold approximately 1.26 million BTC, private companies hold around 281,752 BTC, governments hold nearly 649,954 BTC, and DeFi protocols control about 369,595 BTC. ETFs and exchanges collectively hold roughly 1.62 million BTC.
The data also shows that treasury companies hold approximately 7.25 million ETH.
Including nearly 7 million Bitcoin believed to be held in inactive wallets, close to 11.2 million BTC is currently outside active trading circulation. That represents roughly 56.5% of Bitcoin’s total circulating supply of around 20.05 million coins.
