Ethereum supply shock: Exchange ETH reserves continue to fall after a 26% drop in 2021

The amount of Ether (ETH) held by all cryptocurrency exchanges has declined dramatically in the previous 12 months.

Blockchain analytics firm CryptoQuant reported that Ethereum reserves on trading platforms dropped 26.29 million ETH to 19.22 million ETH year-on-year (YoY), indicating that traders' preference to hold their tokens increased.

At least the Ether price performance in the same period indicates the same. Between August 25, 2020, and press time, the ETH/USD exchange rate exploded by a little over 730%— from $407 to $3,190, signaling an erratic inverse correlation between the Ethereum token prices and its reserves across all exchanges.

In detail, traders typically prefer to keep their crypto assets on exchange wallets when they wish to trade them in the near term. Otherwise, they move those assets to private wallets to control their own keys, a strategy that stems from the fears of losing funds to hacks and similar security breaches at crypto exchanges.

Ether deposits plunge

Another on-chain indicator, built by CoinMetrics to track the total number of Ether deposits to exchanges, also alerted holding sentiment among Ethereum traders. It noted that traders' ETH deposits across all the trading platforms had plunged 21.11% YoY, from 413,772 ETH to 326,408.

But in the last 30 days, the ETH deposits have dropped dramatically by 47.81%, signaling that many investors are expecting higher prices in the long term.

Meanwhile, the sum count of unique addresses holding any amount of Ether in the last 30 days has jumped 1.67%, coinciding with a 42% ETH/USD rally in the same period. On a YoY timeframe, the unique address count has jumped 30.87%.

Supply Squeeze

The Ether holding sentiment has picked momentum in days leading up to and after a landmark Ethereum network upgrade on August 5, 2021. Dubbed as the London Hard Fork, the software update implemented a proposal called EIP-1559 that enabled gas fee burning on the Ethereum network.

This has added deflationary pressure as a result. In the first 20 days after EIP-1559 went live, the network has burned almost 92,595 ETH worth around $295.85 million, according to WatchTheBurn.com.

Related: Ethereum ‘liquidity crisis’ could see new ETH all-time high before Bitcoin — Analyst

More Ether went out of active supply as Ethereum invited participants to deposit 32 ETH to become validator on its upcoming proof-of-stake blockchain. Beacon Chain reports that the so-called Ethereum 2.0 smart contract has attracted a little over 6.9 million ETH worth around $22 billion.

Additionally, demand for Ether continues to grow owing to Ethereum's expanding ecosystem, containing projects from the booming decentralized finance (DeFi) and nonfungible token sectors. 

Last week, Lyn Alden, the founder Lyn Alden Investment Strategy, called the London upgrade a "tactically bullish" event, noting that it could easily push ETH/USD rates to over $5,000.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.