Bitcoin's Price Correlates Strongly With Exchange Flows, Data Shows

Neil Dennis

The relationship between the price of bitcoin and volume flows into and out of exchanges has become much more apparent in the past three months, according to research by Delphi Digital.

In its latest monthly report, independent research boutique Delphi Digital said that as the price of bitcoin has stabilized in the past few weeks it has measured a slowdown in the amount of the cryptocurrency flowing between exchanges and storage wallets.

Indeed, the volume traders have sent to major crypto exchanges is now roughly equal to that being taken off-exchange. This correlates with a largely stable price since the beginning of September, with bitcoin trading in a range between about $10,800 and $10,200. The report said:

The relationship between Bitcoin price and flows is pretty apparent. Price rallies were typically accompanied by sizable inflows to exchanges as individuals looked to take profit.

Move on the Horizon

The chart below shows the correlation between price and flows rather emphatically. However, the analysts noted that large inflows could also be indicative of significant selling pressure if buyers weren't available to match sell orders. This happened in early July, just days after bitcoin hit an 18-month high of around $13,930, as traders took profits following the strong run up in the first six month of 2019.

Delphi DigitalChart by Delphi Digital

Given the period of price consolidation that followed the first-half run up, Delphi's analysts believe there could be a "significant" move imminent, saying that a breakout above the $11,000-$11,200 range could be the catalyst for an even stronger move higher.

Other trading data trackers have noticed a slowdown, not only in bitcoin flows to major exchanges, but also in the number of traders. Recent data from TokenAnalyst showed that after the peak inflows seen in December 2017, the number of unique addresses sending bitcoin to exchanges has been declining. However, this may be due to falling retail investor interest as the institutions become involved.

Research firm Blockchain.com shows trading volumes have been trending lower since bitcoin hit its record high close to $20,000 in December 2017. This year's peak in June saw dollar-value average trading volumes over 24 hours of $672 million - little more than a fifth of the $3.8 billion volumes seen during the 2017 record high.

Generating Trading Signals

TokenAnalyst data shows the correlation between inflows and prices doesn't just apply to bitcoin. It plotted the number of daily inflow transactions against the price of ether. Similarly to the bitcoin data, spikes in inflows preceded the correlating price spike by a couple of days, providing a good - but not infallible - buy signal. The analyst said:

This is not a certain signal but can be rather seen as a hint towards buying or selling sentiments at the market. An interesting next step would be to use this insight for setting up a trading strategy.

Featured image credit: Photo via Pixabay.com.