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Bitcoin and Loss of Trust of CryptoCurrency Exchanges

Cryptocurrency Exchanges
Written by Andy

FTX, once the darling of the crypto industry, filed for bankruptcy protection in mid-November 2022 after an $8bn hole emerged in its balance sheet. Its rapid descent has alarmed investors who keep and trade their assets on other centralised crypto exchanges, leading to record levels of withdrawals of bitcoin, the most widely-traded crypto token.

Most Bitcoiners dislike exchanges – they’re good for only one thing: changing fiat into BTC. Leaving money on the exchange (either in your GBP or BTC account) is money you don’t have in your possession and, much like high street banks, they tend to play with this money rather than just let it sit there. Nobody would keep every single penny of savings in one bank because they can fail (e.g. Northern Rock, BOS etc) because it’s a single point of failure. People that only use 1 exchange, sell their BTC to invest in shitcoins, and keep all their money on the exchange are showing either exceptionally poor understanding of what they are doing, or exceptionally poor financial judgement IMO.

Outflow (i.e. withdrawal) does not necessarily indicate wariness towards the item being sold. E.g. Pulling all of one’s money out of a bank probably does not denote wariness towards the money, it is more likely to denote wariness towards the bank. The record outflows highlight a distrust in centralized exchanges and movement into cold storage. Record sales would highlight investors wariness.

One generally useful statistic that can be derived from Blockchain records is that at least 90% of BTC are held in 2% of wallets. What Blockchain cannot show you is the concentration of ownership of those 2% of wallets. It would seem reasonable to assume that early big miners or buyers (the so-called Whales) have large holdings across multiple wallets. Assuming a huge proportion of BTC are concentrated in a small number of hands and their entry price was – just for the sake of argument – $5,000 then they can drip out BTC sales gradually at a very large profit without disturbing the $16,000-17,000 present price very much. Most will have already made huge profits earlier in the cycle so there is likely no incentive to crash the price by liquidating any significant part of their remaining holdings. That’s as best as I can see it.

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