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In a sign that the cryptocurrency market is maturing, the number of Bitcoin stored on centralized exchanges has fallen to a low not seen in over five years. According to CryptoQuant, an analytics firm focused on on-chain data, the amount of Bitcoin held in centralized exchanges dropped by 5% this month to 2 million BTC, worth approximately $54.5 billion.
A myriad of factors are contributing to this downward trend, which offers both pros and cons for the industry. Newer services like Copper's ClearLoop are gaining traction for their ability to facilitate trades without the need to park funds in a centralized exchange. Markus Thielen, Matrixport's director of research and strategy, notes that as the market grows, traditional exchanges will need to adapt.
The 2021 failure of FTX, once the world's third-largest exchange by trading volume, has also driven investors to keep their Bitcoin off centralized platforms. FTX faced allegations of mishandling user funds, eroding investor trust in centralized exchanges. Thielen pointed out that the cautionary tale of FTX has underscored the significance of self-custody for many in the cryptocurrency community.
Furthermore, a recent report from PricewaterhouseCoopers highlighted that the majority of crypto hedge funds are now opting for diversified custody solutions. Only a small fraction, about 9%, are keeping their assets solely on centralized exchanges. The data indicates a strong inclination for risk mitigation strategies among hedge funds, especially after the incidents of last year, as these institutions hold the minimum amount of coins necessary for daily trading on exchanges.
The decline in Bitcoin held on centralized exchanges can also be seen as a positive indicator of the market's health. Thielen suggested that despite recent price drops, investors are still bullish about the long-term value of Bitcoin and cryptocurrencies. Many are adopting a "buy and hold" strategy, interpreting the lower balances on exchanges as a sign of long-term confidence in the asset.
