Exchange BTC balances hit a new low, gearing up for the next cycle?

Latest on-chain data shows that the balances of Bitcoin and Ethereum at major global exchanges have fallen to a seven-year low.

According to monitoring by Glassnode and CryptoQuant, exchange BTC reserves have dropped below 2.7 million coins, and ETH balances account for less than 11% of the circulating total—this shift may become the core trading logic of the market in Q2.

Supply-side squeeze is driven by three main factors.

First, institutional spot ETFs create a “black hole effect.” From 2025 through early 2026, the BTC absorbed by spot ETFs and corporate treasury holdings across the U.S., Europe, and Asia amounts to 1.2 times the BTC produced by miners over the same period. Institutions use professional custodians such as Coinbase Custody and Fidelity, and assets no longer flow into exchanges’ hot wallets.

Second, the Ethereum ecosystem’s closed-loop dynamics intensify depletion. More than 36% of ETH is locked in the consensus layer and restaking protocols. As users continue to withdraw from exchanges and earn yields on-chain, a physical liquidity shortage forms.

Third, geopolitical volatility and the advancement of the U.S. “Clear Act” trigger large-holder withdrawal moves, moving assets to cold wallets and continuously strengthening long-term holders’ confidence.

Looking back at history, a sharp drop in exchange balances has triggered bull markets twice before.

A decline in exchange balances in Q4 2020 fueled the major bull market of 2021; the outflow of supply ahead of ETF approvals at the end of 2023 pushed BTC from above $25k to beyond $70k.
Meanwhile, the situation in 2026 is even more extreme: at that time, the institutional custody system was not yet mature. Now, the supply flowing into institutions is almost permanently locked; unless there is an extreme systemic liquidation, it is difficult to return to exchanges and form sell-side supply.

This trend will bring two key market impacts.

On one hand, exchange sell-side depth thins dramatically. With liquidity drying up, small buy orders can drive the price to jump non-linearly—but if macro headwinds such as Federal Reserve rate hikes hit at the same time, downside volatility will also intensify.

On the other hand, after the October 2025 leverage washout, the market’s supply composition is extremely clean. If a rate-cut cycle takes hold in the second half of the year or if government reserve-related news is released, the extremely low exchange reserves will trigger a short squeeze with no coins available to buy, helping drive the price to new all-time highs.

In essence, the continued outflow of exchange balances is a sign that crypto assets are shifting from a speculative to a reserve-oriented attribute.

Right now, even though prices are still pulling back due to ongoing geopolitical risk, the bottom-layer supply is gradually stabilizing, and a mismatch in supply and demand depth is brewing.