From the early days of the blockchain movement, exchanges have been the middlemen between consumers and the product. In fact, the exchange business is booming! Millions of dollars in cryptocurrencies are exchanged on different platforms every day. Some of these exchanges have been around for quite a while. Others are newbies in the market. Earlier this week, information obtained from Glassnode showed that the amount of Bitcoin being held on crypto exchanges is at an all-time low in months! Since March 12th and 13th, when the crypto market crashed, people were confident that something similar won’t happen again. Unfortunately, it says otherwise based on the recent data by Glassnode.

Since Bitcoin’s price steadily fell on these two days, data from Glassnode indicates that crypto exchange accounts have seen a decline of $2.85 billion. This means that the number of Bitcoin being held fell from 2,950,000 BTC to 2,700,000 BTC. John Jeffries explains:

“Exchanges have gradually (and painfully) learned how to improve their security systems, how to de-risk by implementing multi-sig wallets, by balancing hot or cold storage, etc. Yet, these improvements appear to be reactionary, and not proactive, which is always a cause for concern.”

So, what exactly is happening?

Distrust in crypto exchanges

The sharp decline in the number of Bitcoins under exchange protection can be a big indication that users are losing trust in these companies’ ability to keep their digital assets safe. In such a case, someone might prefer to create a wallet for themselves and encrypt it accordingly. It has been a common practice for a long time not to keep funds on an exchange if it’s not necessary. Over the years, several incidents have occurred that make users skeptical of exchange security. For instance, in late September, popular cryptocurrency KuCoin was hacked, which was affected by $281 million. Similar cases have been reported in Cashaa, Eterbase, Balancer, and others have also been compromised.

However, two major incidents occurred involving two of the world’s biggest exchanges, which may have been the final straw in making people withdraw their assets. In these cases, the problem didn’t originate from hackers; instead, law enforcement knocked the doors down. Earlier this month, the four co-founders of BitMEX were indicted. What’s more, Star Xu, the founder of OKEx, was also arrested earlier last week. In BitMEX’s camp, nothing much has changed since the indictments were issued. However, on OKEx’s part, Xu’s arrest seems to have ground everything to a halt. Since the arrest, users are unable to withdraw their funds. Although in an October 20th tweet from the CEO of the company Jay Hao said that people’s assets were safe, many are taking it with a pinch of salt.

Building confidence

Even in cases where the access to funds is only temporary, it causes serious concern for the customers. If most people aren’t able to reach their funds, they often panic, and when they are finally able to access it, they empty the account. Incidences such as these seriously erode people’s confidence in exchanges as a safe storage space for these digital assets. Although platforms such as OKEx don’t assume any legal liability in case there is an issue, they should set up structures to help caution the user from losses during incidents like this. Although many experts are raising the flag when it comes to how much control crypto exchanges have on their customer’s funds, proper laws are yet to be established.

While some pundits blame this on what is going on in these two company’s camps, others see a different reason for this trend. Several analysts have indicated that many traders are holding onto their crypto in anticipation of an increase in value. When there are more holders and fewer sellers, this can also bring about a similar effect. According to Glassnode, about half a million wallets are holding about 14% of the total Bitcoin supply, which is about 2.6M $BTC. This holding period may come to an end when Bitcoin increases in value, and investors wish to liquidate some of these assets.