Bitcoin's Exchange Reserve Decline Doesn't Indicate Supply Shock: CryptoQuant

CryptoQuant pushes back on "supply shock" claims, revealing that BTC exiting exchanges is just shifting to ETF custody. The Exchange Reserve has been declining since last year, but the rise of ETFs has offset this decline, meaning the combined supply held across funds and exchanges remains unchanged.

CryptoQuant, a prominent blockchain analytics firm, has recently pushed back on the narrative of a "supply shock" in the Bitcoin (BTC) market. The company revealed that the decline in Bitcoin exchange reserves is not indicative of a shortage but rather a shift in the way Bitcoin is held. According to CryptoQuant, the Bitcoin supply held in custody by exchange-traded funds (ETFs) has offset the decline in exchange reserves, keeping the overall supply unchanged [1].

The exchange reserve, which measures the amount of Bitcoin held on centralized exchanges, has been declining since last year. As of August 17, 2025, the Bitcoin exchange reserves stood at 2.52 million BTC, the lowest level since October 2022. However, this decline has been accompanied by a significant rise in Bitcoin held in ETF custody. The BlackRock iShares Bitcoin Trust (IBIT), for instance, has seen its assets under management grow to nearly $88 billion, indicating a substantial increase in institutional interest in Bitcoin ETFs [2].

CryptoQuant's analysis suggests that the shift in Bitcoin custody from exchanges to ETFs is a natural evolution of the market. As institutional investors seek to gain exposure to Bitcoin without holding it directly on exchanges, they are turning to ETFs. This shift not only provides a more secure and regulated way to hold Bitcoin but also helps to stabilize the market by reducing the volatility associated with direct exchange trading [3].

The decline in Bitcoin exchange reserves is not isolated to Bitcoin but is mirrored in Ethereum, with exchange reserves falling to 18.39 million ETH as of August 17, 2025. This decline reflects a broader trend of asset outflows from centralized platforms, with investors favoring long-term holding strategies and self-custody solutions [4].

Despite the decline in exchange reserves, the overall supply of Bitcoin and Ethereum held in the market remains unchanged. The combined supply held across funds and exchanges remains stable, indicating that the market is not facing a supply shock but rather a shift in the way assets are held. This shift is a reflection of the growing institutional interest in cryptocurrencies and the increasing adoption of ETFs as a means of gaining exposure to these assets [5].

The trend of declining exchange reserves is not unique to Bitcoin and Ethereum. Similar trends have been observed in other cryptocurrencies, with altcoins like FLOKI also seeing a decline in exchange reserves. This suggests a general shift in investor behavior across the crypto market, with traders moving away from centralized exchanges and toward decentralized platforms or long-term storage solutions [6].

The shift in Bitcoin custody from exchanges to ETFs is a significant development in the crypto market. It reflects the growing institutional interest in cryptocurrencies and the increasing adoption of ETFs as a means of gaining exposure to these assets. As the market continues to evolve, it is likely that we will see further shifts in the way assets are held, with a greater emphasis on institutional custody solutions.

References:
[1] CryptoQuant (https://www.cryptoquant.com/)
[2] Bitcoinist.com (https://bitcoinist.com/citigroup-confirms-plans-to-offer-stablecoin/)
[3] AInvest (https://www.ainvest.com/news/bitcoin-news-today-citigroup-explores-stablecoin-custody-crypto-etf-infrastructure-growth-2508/)
[4] Ethereum News Today: Ethereum CEX Reserves Fall 18.39M ETH, Bitcoin Drops 2.52M BTC (https://www.ainvest.com/news/ethereum-news-today-ethereum-cex-reserves-fall-18-39m-eth-bitcoin-drops-2-52m-btc-2508/)
[5] The Business Times (https://www.businesstimes.com.sg/companies-markets/banking-finance/citigroup-considers-custody-and-payment-services-stablecoins-crypto-etfs)
[6] 3 Altcoins See Declining Exchange Reserves in the Second Week of August (https://www.xt.com/en/blog/post/3-altcoins-see-declining-exchange-reserves-in-the-second-week-of-august)