Author: Blockchain Knight

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

According to monitoring by Glassnode and CryptoQuant, the BTC reserves on exchanges have fallen below 2.7 million, and the ETH balance accounts for less than 11% of the circulating total. This change could become the core trading logic of the market in the second quarter.

The supply-side squeeze comes from three core driving forces.

First, the institutionally driven spot ETF creates a "black hole effect." From 2025 to early 2026, the spot ETFs and corporate treasuries in North America, Europe, and Asia will absorb BTC equivalent to 1.2 times the miners' output during the same period. Institutions mostly use custody services like Coinbase Custody and Fidelity, meaning assets are no longer flowing into the exchanges' hot wallets.

Second, the Ethereum ecosystem's closed loop is exacerbating exhaustion, with over 36% of ETH locked in consensus layers and re-staking protocols, as users continue to withdraw tokens from exchanges to earn yields on-chain, creating a physical liquidity shortage.

Third, geopolitical fluctuations and the advancement of the U.S. "Clarity Act" trigger a movement of major holders withdrawing tokens, transferring assets to cold wallets, and strengthening long-term holding confidence.

Looking back in history, a substantial decline in exchange balances has previously triggered bull markets twice.

The balance drop in the fourth quarter of 2020 led to the major bull market in 2021, and the outflow of chips before the approval of ETFs at the end of 2023 drove BTC from $25,000 to over $70,000.

The situation in 2026 is even more extreme. At that time, the institutional custody system will not be mature; the chips flowing into institutions are almost permanently locked. Unless there is an extreme systemic liquidation, it will be difficult to return to exchanges to form selling pressure.

This trend will bring two key market impacts.

On one hand, the selling pressure on exchanges will significantly thin out. Under liquidity exhaustion, small buy orders can push prices to jump non-linearly, but if macroeconomic negatives like Fed interest rate hikes occur, downward volatility will also intensify.

On the other hand, after the leverage cleansing in October 2025, the market chip structure will be extremely clean. If an interest rate cut cycle is realized in the second half of the year or government reserve news is released, the very low reserves on exchanges will trigger a short squeeze due to a lack of coins to buy, helping the price to reach historical highs.

Essentially, the continuous outflow of exchange balances signifies a transition of crypto assets from speculative properties to reserve properties.

Although there is a continuous pullback due to geopolitical risks, bottom chips are gradually stabilizing, and a deep supply-demand mismatch is brewing.

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