Key Takeaways
- Only 15% of ETH is on exchanges, the lowest number in 5 years
- Drop has been swift since staking opened up in late 2020
- Bitcoin and stablecoins have also fled exchanges, meaning liqudiity is thin
- Volatility has risen as a result, with aggressive moves to the downside also possible, despite bullish first quarter for market as a whole
Ethereum has had an eventful few years.
Obviously, it was tossed around violently in line with the rest of the crypto market. Bouncing around the $100 or $200 levels for a lot of 2018 to 2020, it suddenly thrust upwards during the pandemic, getting close to $5,0000 in late 2021 before crashing back down below $1,000.
Crypto is fleeing exchanges
While price is all there is to talk about for the vast majority of crypto projects, I don’t want to focus on that here. Let’s look at the supply of ETH on the market.
I published a deep dive recently looking at how capital has fled the crypto markets at large, with 45% of the stablecoin balance on exchanges exiting in the last four months, the toal balance now the lowest since October 2021.
This pattern is being followed with cryptocurrencies across the board. Bitcoin has only 11.8% of its supply on exchanges, the lowest since the bull market top five years ago. Looking at Ethereum, there has been a rapid decline in the supply on exchanges, now the lowest in 5 years at 18.1 million ETH.
Or, looking at the percentage of the total supply, there is now only 15% of ETH on exchanges.
Ethereum staking could change all this
With Ethereum, however, there is an elephant in the room. Namely, the ETH staking contract that was opened up in November 2020. This allowed users to lock up their ETH in anticipation of the Merge, Ethereum’s transition to a proof-of-stake network, which eventually went live last September.
Stakers only got access to their tokens last week, however, as the Shanghai upgrade went live. And when you plot the amount of ETH locked up in the staking contract compared to the ETH on exchanges, it is a clear factor.
Nonetheless, that ETH is now live again. Or at least, stakers can choose to withdraw it if they like. The early diagnosis is that there hasn’t been any extra selling pressure, with ETH leading the crypto market post-Shanghai and breaking past the $2,000 barrier for the first time since May 2022, the month the infamous UST collapsed and sent the crypto market into a tailspin.
Lack of supply ramping up volatility
The thin amount of ETH on exchanges, in addition to the sparse amount of Bitcoin and stablecoins, is kicking up crypto volatility so much higher.
This is part of the reason that the market has bounced so sharply in the first quarter of the year. The more optimistic forecast on the Federal Reserve’s interest policy provided the impetus, and with so little capital in the market, it hasn’t been hard to move prices.
At the end of the day, a price is just a bid finding an ask. And with much fewer bids and asks out there, it’s easy to see why prices have been so sensitive.
It is tempting to conclude that the stingy supply is bullish for holders of these coins (and in the short-term, while the market is rising, it is – as we have seen with prices so easy to move recently). But on a bigger picture, this is not a good thing.
Firstly, the opposite is also true – thin liquidity exacerbates moves to the downside as well as the upside, so if the market turns, there is far less to absorb the selling pressure, meaning the surge we have seen in the past couple of months can be reversed easier than normal.
But overall, crypto needs liquidity. The asset class is aiming to establish itself as a reputable brach of the financial economy. It needs a liquid market to buy and sell, and capital moving out of the space is not a good thing.