Study: Cryptocurrency Exchanges and Bitcoin Price

Before we dive in, we should make one thing clear. We do not believe that cryptocurrency exchanges are manipulating the price of Bitcoin (although those accusations have been made by others). Instead, in this blog post we will examine how cryptocurrency exchanges impact the price of Bitcoin. Some research conducted by our sister company, Whale Trace, a next generation whale transaction tracking API, has revealed some fascinating correlations between the amount of Bitcoin on exchanges and the price of Bitcoin. But first, a bit about us.

A screenshot from the CryptoMood app

Here at CryptoMood, we are always looking for any sort of data which could help enhance cryptocurrency trading. We go through a mountain of sources (over 50 000, to be exact) just to develop the sentiment indicators used by our mobile app and desktop terminal. These have helped cryptocurrency traders enhance their returns because they are able to leverage how the market feels to better sell the tops and buy the dips of short-medium term price action for over 3000 assets.

The famous supply and demand graph

That was a mouthful, but here is something else to chew on: the less Bitcoin there is on exchanges, the higher the price of Bitcoin. This might raise an eyebrow at first but upon closer examination (with a little bit of squinting) you will see that this makes a lot of sense. When there is less Bitcoin on the open market (AKA on cryptocurrency exchanges) then that means the supply is low. Assuming demand for Bitcoin stays the same or even increases, then this will drive up the price. The increasing amount of people HODLing their crypto is therefore contributing to the rise in Bitcoin’s price.

Wallets of Bitcoin miners and Bitcoin’s price

“But wait a minute” you might be asking “how do you know how much Bitcoin cryptocurrency exchanges have at any given time”? Great question! Data scientists at Whale Trace have been closely examining different Bitcoin wallet address “profiles”. Since Bitcoin is on an open blockchain, you can see all the transactions going in and out of various wallets. Based on this data you can actually create a sort of behavior profile which gives you a surprisingly accurate representation of what that wallet is being used for.

A screenshot of Orchid’s (OXT) token distribution on Etherscan.io

Here’s a simple example. Imagine you’re casually scrolling through the list of wallet addresses on Etherscan. You click on one of them and see that this address has an INSANE amount of Ethereum and other ERC-20 tokens, maybe into the tens of millions in USD. You also see that there are thousands of transactions going in and out of this wallet every hour. Does this wallet belong to an individual? Maybe, but it is way, way more likely that it belongs to a cryptocurrency exchange like Binance or KuCoin.

Now apply this same logic to Bitcoin (or basically any other public blockchain for that matter) and you can start to separate wallets into different categories. For this article we will focus on exchange wallets, but you can read more about the other profiles in our recent blog post about the different types of cryptocurrency wallets. It is really interesting, so check it out if you have time!

Right, so now you know how Whale Trace identifies Bitcoin wallets which likely belong to cryptocurrency exchanges. Now let us take it one step further. Since balances on wallets are also publicly available, we can see how much Bitcoin these exchange wallets are holding at any given time. As mentioned, these can fluctuate immensely day by day, especially during bull markets. This is why the data scientists are Whale Trace examined everything from a 100 day period (and they think even that was not long enough!).

When you take the assumed balance of Bitcoin on cryptocurrency exchanges and put it next to the price action of Bitcoin over that same time period, you can actually see a very clear negative correlation. In plain English, the less Bitcoin there is on exchanges, the higher the price. Just as predicted! Now the question is: what exactly is the time frame for this correlation? In other words, how long does it take for the price of Bitcoin to change when there is less of it on exchanges?

Well, the brilliant data scientists at Whale Trace found that the correlation between the assumed balance on Bitcoin on exchanges and the price of Bitcoin is 28 days. What does this mean? This means that in theory, the balance of Bitcoin on cryptocurrency exchanges today is most strongly correlated (negatively) with the price of Bitcoin 28 days LATER! Since correlation does not equal causation, we can not say that this necessary causes the price to rise, but common sense suggests it could very well be playing a large effect.

The last thing to mention is that this “prediction” is only 60% accurate. In other words, you would only know with 60% certainty that the price of Bitcoin would be within a certain range 28 days later. This might not sound all that impressive, but it is remarkably better than 50/50. Data scientists at Whale Trace believe it is possible to further refine this data and possibly find even stronger correlations. It is also worth nothing that although 60% may not seem too significant compared to 50%, with enough repetition this would be mean substantial trading gains over the long term. Super promising stuff!

CryptoMood uses Whale Trace and you can download both mobile apps for free. Check them out, let us know what you think, and follow us on our social media accounts to stay up to date on more exiting research we (and our homies at Whale Trace) will be bringing to you in the coming weeks!  

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