Is Profit-Taking To Blame For A Decrease In High-Value BTC Wallets? The Answer May Be More Nuanced Than It Seems

April 6, 2021 04:00 PM
Top 10 Cryptos By Market Cap

Top 10 Cryptos By Market Cap




Crypto was higher this morning with altcoins leading the way. Ripple (XRP) is by far the best performer in the Top 10 and has jumped back to being the 4th largest coin by market cap.

Crypto Story of the Day

Last week we highlighted the decreasing number of wallets holding over 10,000 and 1,000 BTC since November and February and have since fielded questions about whether the metric signals profit-taking. We feel the answer is more nuanced and in part highlights evolving characteristics of the asset, such as new custody solutions.

Network data, such as wallet balances, are limited in historical comparisons considering the earliness of the asset and evolving adoption. Nevertheless, changes in the number of wallets with particular balances have coincided with price movements in the past. 

Previously, for example, the number of wallets with a 1,000 balance witnessed a notable decrease that began in August 2017 as the asset was breaking then-record highs of roughly USD 4,000. Fluctuations in wallet balances, however, have also been accompanied by a growing number of institutional custody solutions available to investors. These include the launch of Coinbase Custody in 2018 for U.S. users, then internationally in 2020. 

Beyond the proliferation of custody technology, custody providers have also seen increased legal visibility. Anchorage, a firm offering custody solutions, received “conditional approval” by the U.S. Office of the Comptroller of the Currency to launch Anchorage Digital Bank National Association, “the first federally chartered digital asset bank in history,” in January. 

New entrants into the crypto space have relied on incumbent crypto custody providers, such as Paxos in the case of PayPal, highlighting the increased trust in custody solutions that have emerged over the years. Unlike crypto exchanges, which often choose to make their wallet addresses known in order to maintain transparency, custody providers’ wallets are not known and their customers likely prefer the opposite of public transparency.  

To that end, BTC wallets can be set up to appear as multiple addresses on the blockchain while being controlled by 1 set of private keys. A set of private keys, as such, can control an unlimited number of addresses, which show no obvious relation to one another on widely-available blockchain explorers. This technique is also available to retail-focused solutions such as Ledger, which can generate a new address for each time a user receives BTC in order to maximize privacy. 

BTC holders are also known to disperse coin across multiple addresses controlled by separate private keys in order to reduce concentration risk. Whether controlled by multiple keys or 1 set, practical evidence suggests large institutional BTC holdings are spread over multiple addresses. For example, Grayscale BTC Trust holds USD 38.1 billion-worth of BTC with Coinbase Custody, while the largest BTC address holds USD 8.4 billion.

While changes in the described wallet addresses have at times suggested some relation with price movements, the changing nature of the asset’s adoption has likely also impacted the metric. The growing USD-value of BTC holdings in these addresses has decreased the relative cost of more sophisticated, privacy-enhancing custody solutions, which likely appear as numerous addresses publicly. 

At the same time, the availability of custody solutions that may skew wallet balances has also significantly increased throughout the last 2-3 years. As such, wallet balances likely take into consideration custody solutions as well as the coin’s price movements.

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About the Author

FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets. You can subscribe to FRNT Financial Morning Note at