Loaded for Bear: Bitcoin Private Wallets, Exchange Reserves and Prices
61 Pages Posted: 4 Sep 2021 Last revised: 25 Jul 2022
Date Written: August 10, 2021
This study highlights a special feature of cryptocurrency trading and offers information about investor behavior that cannot be observed in traditional financial markets. We find that investors prefer holding bitcoin off exchanges in private wallets and primarily use exchanges to trade. Consequently, bitcoin exchange reserve changes resulting from the movement of bitcoin between private wallets and exchange accounts are negatively related to contemporaneous and future bitcoin returns. Specifically, the transfer of bitcoin on exchanges implies increased selling pressure and the transfer off exchanges implies decreased selling pressure. In turn, flows onto exchanges are triggered by large negative shocks and increased volatility.
Keywords: blockchain; bitcoin; exchange reserves; price pressure; on-chain transactions; off-chain transactions
JEL Classification: E42, F31, G12, G17
Suggested Citation: Suggested Citation