Bitcoin inter-exchange flows as a market cycle indicator

Julio Moreno
CryptoQuant
Published in
3 min readAug 8, 2022

OVERVIEW

What do bitcoin flows between exchanges tell us about the market cycle?

Our analysis focused on bitcoin flows between different exchanges, especially looking at flows between spot exchanges (Coinbase in this case) and derivative exchanges (all derivative exchanges) using CryptoQuant’s bitcoin exchange flows data.

Our primary findings are as follows:

  • The direction of bitcoin flows is an indicator of the market cycle. The market is in a bull run when bitcoin flows from Coinbase to derivative exchanges. On the other hand, when the flows reverse and bitcoin starts to exit derivative exchanges and go into Coinbase, it can be interpreted as a sign of the market turning bearish and entering a downward trend.
  • The bitcoin price inflection points (tops and bottoms) have coincided with a change in the trend of flows (defined as the 1-year cumulative inter-exchange flows crossing their 90-day moving average).
  • From a flow perspective, bitcoin remains in a bear market at the moment as coins are still moving out of derivative exchanges into spot exchanges (Coinbase in this case).

METRICS

The chart below shows the price of bitcoin (black line) and the 1-year cumulative amount of bitcoin going from Coinbase to derivative exchanges (dark purple line). We can easily see that the growing amount of coins flowing to derivative exchanges coincides with bull runs and vice versa.

Moreover, the shift in the trend of bitcoin flows (as defined by flows crossing their 90-day moving average, the purple dashed line in the above chart) has been a signal of market tops and bottoms (dashed vertical red line for tops and green for bottoms in the above chart).

In the current market, we can see that bitcoin net flows are still trending downward (bitcoin is still moving from derivative exchanges to Coinbase) and remain below its 90-day moving average. For this reason, the price remains in a downward trend according to this metric.

We can also visualize the above claim by plotting the bitcoin price against the 7-day percentage change of these flows. Again, the green line indicates significant bitcoin flows to derivative exchanges (typical in a bull market), and the red line represents bitcoin outflowing from derivative exchanges (typical in a bear market).

The above chart displays that prices remain in a bear market as the 7-day percentage change in flows from Coinbase to derivative exchanges have been mostly declining (red line).

INTERPRETATION

  • Why does bitcoin flow from Coinbase to derivative exchanges? During a bull run, markets switch to a “risk-on” mindset. In this context, bitcoin traders increasingly send their coins to derivative exchanges to trade bitcoin with leverage or use their bitcoin as collateral to trade other cryptocurrencies.
  • Why does bitcoin flow out of derivative exchanges to Coinbase? During a bear run, markets switch to a “risk-off” attitude. Therefore, bitcoin traders will increasingly send their coins out of derivative exchanges to spot exchanges to sell them and convert to actual fiat money. Spot exchanges, in our case Coinbase, serve as off-ramps (sell bitcoin to get fiat money transferred to a bank account), while derivative exchanges are not typically used as off-ramps.

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