Exchange inflows, on-chain data show retail traders fueled Bitcoin’s sell-off

For the crypto faithful who have been in the space since 2017, the market moves over the past few days have caused flashbacks for some, stirring up long-repressed memories of Bitcoin’s (BTC) fall from $20,000 to $3,000 at what was the start of a long, two-year "crypto winter."

The 50% plunge in Bitcoin's price from just shy of $60,000 on May 10 to a low of $30,000 during the worst part of the May 19 sell-off has prompted many to say the top is in for the 2021 bull market, but a recent article by Chainalysis chief economist Philip Gradwell highlighted some key data points that indicate that the market may still have higher ground to claim in the months ahead.

Corrections larger than 25% are the norm in bull markets

To kick things off and bring a little perspective to the matter, Chainalysis pointed out that there have been four other occasions since 2017 where Bitcoin's price has fallen by more than 25% over a seven-day period. The massive price collapse to $4,000 in March 2020 is the most recent example.

While this week’s price drop in both Bitcoin and Ether (ETH) followed their recent all-time highs, the current price levels remain elevated from a historical perspective, with further upside potential after an undetermined period of consolidation.

Gradwell highlighted the fact that now that the wider cryptocurrency sector has grown in prominence and is part of the mainstream narrative, “The industry needs to answer questions about environmental impact, use cases, illicit activity and regulation.”

Winter is NOT coming... yet

As for whether or not another crypto winter is approaching, Gradwell appears inclined to believe that the market is not quite there and referred to the “many differences between now and the major price declines in March 2020 and December 2017” as backing up this point of view.

The rising popularity of cryptocurrency in 2021 has brought a large number of new entrants into the market who have bought large amounts of cryptocurrency, raising the stakes for the market as a whole and increasing the overall market capitalization.

According to Gradwell, on-chain data suggests that:

“Retail is selling on exchanges while institutional investors are simply not buying as much as before rather than selling.”

This data should help to dispel the rumors that institutions have been one of the main driving forces behind the recent sell-off.

Retail dumps while whales accumulate

As seen in the chart above, Bitcoin inflows to exchanges over the past week were low compared wit previous sell-offs, with 412,000 BTC being deposited over the last three days versus 412,000 BTC deposited on just March 13, 2020.

According to Gradwell:

“This suggests that much of the selling is from people with assets already on exchanges, who tend to be retail investors.”

To further back this understanding, Gradwell pointed to the following chart showing the “change in Bitcoin held by post-2017 investor whales for the 14 days before the price bottom of the current and past declines.”

As seen in the chart, post-2017 investor "whales" bought 34,000 BTC between May 18 and 19 after reducing their holdings by 51,000 BTC during the two weeks prior, showing a stronger response than did investors in March 2020.

This indicates that while still cautious, whales have been tempted to buy this dip rather than sell into it, suggesting that the larger participants in the crypto economy still feel there is further upside ahead for Bitcoin and the cryptocurrency market in the bull run of 2021.

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