The US regulatory environment continued to be hostile this week, with the SEC charging Binance and Coinbase with securities violations. In this issue, we assess investor reaction from the perspective of exchange inflows, as well as which investor groups are panicking and which are keeping calm.
It’s been another turbulent week for the regulatory landscape for digital assets, with the U.S. Securities and Exchange Commission (SEC) filing legal charges against two of the largest exchanges, Binance and Coinbase. Both filed complaints related to listing and trading tokens that the SEC believes are unregistered securities, and claiming that the earning and staking services provided also violated securities laws. In the case of Binance, the charges expanded further, alleging that the entity engaged in wash trading and commingled customer funds between domestic and offshore entities.
As news of the Binance fee broke on June 5, digital asset markets traded lower, with ETH down -5.4% and BTC down -6.8%. Both assets recovered those losses as news of the Coinbase fee broke on June 6. However, by the end of the week, ETH had fallen further, down -8.2%, while BTC fared slightly better at -6.4%.
Given the severity of the allegations against the two largest exchanges, and the increasingly hostile regulatory environment in the U.S., we will focus on investor reactions, with a particular eye on exchange activity. By examining a breakdown of exchange activity, we are looking for evidence of any negative shifts in investor sentiment.
Foreign exchange outflow
Immediately after the Binance headlines broke, tokens began to flow out of the exchange. The chart below shows a 2-week view of Binance's exchange reserves for major assets; BTC, ETH, and stablecoins (USDT, USDC, BUSD).
Over the past seven days, investors have withdrawn assets at a steady pace, with total stablecoin balances falling by more than $1.6B, equivalent to 20.9% of Binance’s total balance. BTC and ETH reserves have fallen by 5.7% and 7.1%, respectively.
While Binance has seen net outflows, we must remember that the exchange still holds the largest reserves of any entity on-chain, and their BTC and ETH balances remain sizable.
Binance’s stablecoin reserves have seen the largest drop, falling dramatically from over $26.0B in November 2022 to $6.5B today (a 75% drop). This is partly due to the SEC’s previous complaint against BUSD, which caused issuer Paxos to enter a redemption-only mode (WoC 14).
For Coinbase, net reserve changes were far less dramatic, with stablecoin balances flat on the week and BTC balances down by just 2,300 BTC (0.5% of the total).
However, Ethereum balances did see a significant drop of 291k ETH, equivalent to around 8.0% of total balances. This suggests a more pronounced reaction from investors, which could be related to the staking services provided coming under fire.
Foreign exchange deposit breakdown by queue
A breakdown of exchange withdrawals by dollar size shows an interesting divergence in investor behavior this week:
Trades under $10 million have been seeing withdrawals, with net outflows exceeding $130 million per day throughout the week.
Transactions over $10 million have a steady flow of deposits, with inflow rates ranging between $15 million and $30 million per day.
This suggests that very large entities, such as institutions, are affected by SEC news to a greater extent than smaller entities. It remains to be seen whether this becomes a more permanent trend in the coming weeks.
The chart below overlays deposits and withdrawals on BTC exchanges, showing how bidirectional flows track each other very closely. This week was no exception, with both inflows and outflows increasing by about 70% to $845 million per day.
Overall withdrawals this week exceeded deposits by about 10%, suggesting that self-custody remains the preferred strategy for investors overall. A similar dynamic was observed around recent major exchange-related news, namely the FTX debacle (WoC 46-2022).
Focusing on total deposit volume, we can segment by cohort type. Thus, we can identify which investor groups reacted most significantly to the news:
Short-term holders account for 76.4% of deposits (23.0k BTC)
Long-term holders only account for 1.9% of deposits (570 BTC)
Inter-exchange transfers account for 21.7% of deposits (6.53k BTC)
Historically, STH accounts for around 60% of deposit flows, suggesting that recent buyers have been most active this week. Inter-exchange flows are typically around 35%, suggesting that margin investors prefer to self-custody rather than simply moving tokens to different exchanges.
The chart below confirms the first observation, with the STH cohort sending 0.93% of its total holding balance to exchanges this week. While not yet above the 1% threshold we often see associated with high volatility events, this is a notable uptick relative to the 2021-22 cycle baseline.
On the other hand, long-term Bitcoin holders were very calm and did not show a significant reaction to the news. Their exchange inflows this week were only 0.004% of their total holdings, with 66% of the trading days seeing relatively large inflows.
Awareness of indifference
While the above chart shows a subset of recent buyers who sent coins to exchanges this week, the deeper picture is more intriguing. The chart below shows the total realized profit or loss locked in exchange deposits, and we can see that both sides are relatively small.
Of all the tokens flowing into exchanges, only a very small number have any significant profits or losses locked in. In other words, most of the tokens sent to exchanges were acquired at prices very close to the current spot rate and, given the dominance of short-term holders, were likely acquired recently.
This suggests some confidence (investors overall were unmoved by the news) but also apathy (the current price range is not enough to stimulate consumption).
With realized P&L so low, the sell-side risk ratio has fallen to an all-time low. This metric compares the total profit/loss locked in the market to the size of the asset (realized cap).
The total value of P&L locked in is very small relative to the current $391B in Bitcoin realized cap. Low values of the sell-side risk ratio have historically occurred during periods of heightened investor apathy, usually on the back side of deep bearish trends.
We can see that the total transfer volume is also at a cyclical low. The overall transfer volume did not rise significantly this week, remaining at around $2.85B/day.
Similar to the Sell-side Risk Ratio, we can also compare the amount of realized profit or loss to this transfer volume through the Realized RVT Ratio. This indicator is also in a strong downtrend, which is a typical bearish trend as apathy and boredom take over.
The duration and timing of pain behind bear markets is a characteristic of many assets and markets, and here we can visualize this through these two indicators.
Summary and Conclusion
The regulatory environment in the United States remains hostile, with the SEC bringing very significant charges against the two largest exchanges, Binance and Coinbase. Balances of major assets on both exchanges fell this week as some customers withdrew out of concern. With the exception of Binance’s stablecoin, the declines were entirely in line with typical patterns, and it remains to be seen how investors react as both lawsuits come to an end.
In the short term, many recent BTC buyers (STH) appear to have sent their Bitcoin to exchanges to sell in order to reduce the risk of their positions. However, more broadly, the very low realized P&L locked in and little reaction from long-term holders suggest that many investors were not surprised by the news.
