FTX’s Collapse Triggers Dramatic Shift Towards Self-Custody For Bitcoin, Ethereum

FTX's Collapse Triggers Dramatic Shift Towards Self-Custody For Bitcoin, Ethereum

Crypto holders have been reacting to the dramatic collapse of FTX by withdrawing their Bitcoin, Ethereum and other cryptocurrencies from exchanges to self-custody wallets.

Last week, Bitcoin fell sharply in the wake of revelations that FTX financials had come under acute stress, dropping to as low as $15,675. The collapse, which is by far the most shocking insolvency of a custodian since Mt. Gox, caused widespread contagion for the crypto market as investors took a risk-off approach fearing a further market plunge. 

As a result of the sharp recoil in prices, Bitcoin Long-Term Holders are currently experiencing acute financial stress, holding an average of -33% in unrealized losses. “This is comparable to the lows of the 2018 bear market, which saw a peak unrealized loss of -36% on average,” Glassnode tweeted.

However, the most notable outcome of the FTX fallout has been the mass withdrawals of BTC and ETH from crypto exchanges into self-custody wallets as the debate on the dependability of centralization fires up. In the past week, crypto-Twitter has been awash with calls to take off coins from exchanges as crypto firms struggle to assure customers of their funds’ safety.

“FTX leveraged its clients’ money and lost millions. Self-custody is one solution to protect yourself,” Crypto-friendly Rep. Warren Davidson (R-Ohio) tweeted late Wednesday.

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And that advice has been taken seriously by investors, who have been withdrawing coins to self-custody at a historic rate of 106k $BTC/month, according to Glassnode.

On an industry-wide scale, we have seen a withdrawal of coins from exchanges at a truly historic rate, as holders seek the safety of self-custody,” Glassnode stated in a November 16 week on-chain video update.

According to a chart depicting Bitcoin’s Exchange Net-Position Change, exchanges have seen one of the largest net declines in aggregate BTC balance in history, falling by 72.9k BTC in the past seven days. According to the firm, this compares with only three periods in the past: April 2020, November 2020 and June-July 2022.

The firm also mapped out a similar picture for Ethereum. In the past week, 1.101 million Eth was withdrawn from exchanges into self-custody wallets, “This makes for the largest 30-day balance decline since September 2020 during the peak of “DeFi Summer”, where the demand of Ethereum was sky high for use as collateral in smart contracts,” the firm added.

Notably, although the FTX event continues to pose a serious risk to the crypto industry as more of the exchange’s lending partners report coming under financial pressure, the situation is expected to improve over time.

Meanwhile, despite plunging sharply last week, Bitcoin has defied bear pressures in the past week, a factor that has largely to do with the mass exchange outflows.

BTCUSD Chart by TradingView

At press time, BTC was trading at $16,637 after a 0.38% drop in the past 24 hours. The cryptocurrency has grown by 0.68% in the past week based on CoinMarketCap data.