Ethereum Seeing High Exchange Outflows, But Watch Out For This Bearish Signal

On-chain data shows Ethereum has been observing high exchange outflows recently, but a development related to Tether (USDT) may be a bearish obstacle for the market.

As explained by the on-chain analytics firm Santiment in a new post on X, the market is ending July on a mixed note in terms of the exchange flows. The metric of interest here is the “Exchange Flow Balance,” which measures the net amount of a given asset that’s entering into or exiting the wallets associated with centralized exchanges.

When the value of this metric is positive, it means the inflows to these platforms are outweighing the outflows right now. Such a trend implies there is currently demand for trading away the asset among the investors.

On the other hand, the indicator being negative implies the holders are making net withdrawals from the exchanges, potentially holding onto their coins in the long term.

What implications either of these trends would have on the wider market depends on the exact type of cryptocurrency the one in question is: stablecoin or volatile asset. In the context of the current topic, Santiment has cited the data for Ethereum and Tether, which means both types of coins are relevant here.

Below is the chart shared by the analytics firm that shows the trend in the Exchange Flow Balance for the two assets over the past few months:

As displayed in the above graph, the Exchange Flow Balance has recently observed a sharp negative spike for both Ethereum and Tether recently, implying that investors have been taking large amounts of these coins off into self-custody.

For volatile assets, trading the asset away can have a negative effect on its price, so the exchange reserve going up can be a bearish sign. The Exchange Flow Balance being negative, on the contrary, can be bullish, as it implies the potential “sell supply” of the coin is decreasing.

During the latest outflow spree, investors have withdrawn 80,763 ETH (almost $268 million) from these platforms, which is the largest outflow spike in five months. Thus, Ethereum has seen its sell supply go through a significant decline.

In the case of stablecoins, exchange inflows also mean the investors want to swap the asset, but as these tokens have their value “stable” around the $1 mark by definition, such trades have no effect on their price.

This doesn’t mean that they aren’t of any consequence to the market, however, as investors usually use stables to buy a volatile asset like Ethereum, so large exchange inflows of a stablecoin like Tether can be bullish for these other coins.

In this view, the exchange reserve of USDT and other stables can be considered as a potential “buy supply” for the volatile cryptocurrencies. Recently, USDT has seen net withdrawals of $346 million, meaning that this buy supply has gone down.

“This reflects less buying power for future purchases from traders, which is generally a necessary ingredient needed to boost prices in the long run,” notes Santiment. It now remains to be seen how the Ethereum price will develop in the near future, given that both bullish and bearish developments have simultaneously occurred in the market.

At the time of writing, Ethereum is trading at around $3,300, down more than 3% over the past week.