Bullish case for Ethereum strengthens as exchange ETH outflows outpace Bitcoin

Bullish case for Ethereum strengthens as exchange ETH outflows outpace Bitcoin

Ether (ETH) reserves on exchanges are continuing to decline despite being at historic lows. This trend indicates a supply shortage of ETH across major trading platforms following the release of an Ethereum 2.0 deposit wallet for staking.

As Cointelegraph previously reported, staking neared $4 billion in January 2021, leading around 2% of ETH’s supply to be locked in the Eth 2.0 deposit contract.

The low supply of ETH on exchanges should decrease the overall selling pressure on the asset, especially if the demand for ETH increases in tandem with the rapid growth of the DeFi market. 

ETH all exchange reserve versus BTC. Source: CryptoQuant

Why isn’t ETH seeing strong upside momentum?

Relative to the amount of ETH that is circulating in the exchange market, the price of ETH has not seen strong upside momentum as seen in early February.

Analysts at the on-chain data analytics platform CryptoQuant said:

“$ETH reserve across all centralized exchanges is decreasing, while $BTC reserve is repeating up and down since January this year.”

There are two main reasons why ETH has been consolidating in the past two weeks. First, the spike in the 10-year U.S. Treasury yield caused the overall risk-on market to slump. Second, Bitcoin has been outperforming ETH, stumping Ether’s momentum.

But, in the foreseeable future, both traders and on-chain analysts anticipate ETH to regain momentum.

ETH 1-day chart with key levels. Source: TradingView.com, Cactus

A pseudonymous trader known as “Cactus” said that based on its technical market structure, ETH is poised to see a new all-time high as long as it holds $1,750. He wrote:

“As long as we keep absorbing sells here and daily closes are above $1750 region, then expecting new ATH soon.”

Moreover, the latest dip in BTC price didn’t see a major drop in ETH, while the ETH/BTC pair actually saw a surprising bounce, which means that the bull cycle remains intact. 

“The next big impulse wave could happen once this period of consolidation and compression is completed. This next impulse wave should propel Ether far above $2,000,” Cointelegraph Markets’ analyst Michael van de Poppe explained in his latest analysis. 

Atop the declining exchange reserves and the favorable technical market structure, CryptoQuant CEO Ki Young Ju noted that ETH saw its second-largest hourly outflow in 2021 on March 16. 

Outflows from exchanges are typically a sign of positive market sentiment because it likely means that an institution or a high-net-worth investor is accumulating ETH and sending it to a self-hosted wallet. Ki said:

“We just had the second-largest $ETH outflow this year in hourly data. It seems a sell-side liquidity crunch on centralized exchanges is intensifying. This is bullish.”

Declining exchange reserves alone might not be sufficient to paint a bullish short-term trajectory for ETH due to Ethereum 2.0.

In the first few weeks of launch, Lido, a staking platform, saw over 60,000 ETH staked through Ethereum 2.0.

Due to Lido staking and the deposits into the Eth 2.0 contract address, ETH saw a massive drop in exchange reserves. However, without major catalysts, Bitcoin has seen its exchange reserves also drop significantly in the same period.

As such, it is critical that other important on-chain data points, such as increasing transaction volume and short-term exchange outflow spikes supplement the general downtrend of exchange reserves to strengthen the argument for a broader near-term rally.

Treasury yields and equities market momentum are key

In the foreseeable future, cryptocurrencies would most likely see some correlation with the U.S. Treasury yield and the equities market.

Over the past month, the crypto market saw a high inverse correlation with the 10-year Treasury yield.  

BTC/USD vs. 10-year Treasury yield (orange). Source: Tradingview

As the Treasury yield neared 1.6% in late February, Bitcoin price pulled back to its recent lows of $43,000, bringing down Ethereum and other top alternative cryptocurrencies with it.

As long as the Treasury yield remains stable, with stimulus checks rolling out in the U.S., the outlook for Ethereum should remain optimistic throughout March.