The latest on-chain data shows that the balances of Bitcoin and Ethereum on the world's mainstream exchanges fell to a seven-year low.

According to monitoring by Glassnode and CryptoQuant, the exchange's BTC reserves fell below 2.7 million, and the ETH balance accounted for less than 11% of the total circulation. This change may become the core trading logic of the market in the second quarter.

Supply-side squeeze stems from three core driving forces.

First, institutional spot ETFs have formed a "black hole effect". From 2025 to early 2026, the BTC absorbed by spot ETFs and corporate treasury in the United States, Europe and Asia reached 1.2 times the output of miners during the same period. Institutions all use professional custody such as Coinbase Custody and Fidelity, and assets no longer flow into exchange hot wallets.

Second, the Ethereum ecological closed loop is intensifying and depleting. More than 36% of ETH is locked in the consensus layer and the re-pledge agreement. Users continue to earn income from the exchange withdrawal chain, resulting in a physical liquidity shortage.

Thirdly, geopolitical fluctuations and the advancement of the Clarity Act in the United States triggered currency withdrawal movements by large investors, transferred assets to cold wallets, and continued to strengthen confidence in long-term positions.

Looking back at history, significant declines in exchange balances have triggered bull markets twice.

The decline in balances in the fourth quarter of 2020 gave birth to a bull market in 2021. The outflow of chips before the ETF was approved at the end of 2023 pushed BTC from US$25,000 to over US$70,000.
The current situation in 2026 is even more extreme. At that time, the institutional custody system was not yet mature. Now the chips flowing into institutions are almost permanently locked. Unless there is extreme systematic liquidation, it will be difficult to return to the exchange to form a selling order.

This trend will bring about two key market impacts.

On the one hand, the depth of selling orders on exchanges has become significantly thinner. When liquidity is exhausted, small purchases can drive prices to jump non-linearly. However, if there are macroeconomic negatives such as the Federal Reserve raising interest rates, downward fluctuations will also intensify.

On the other hand, after the leverage cleanup in October 2025, the market chip structure is extremely clean. If the interest rate cut cycle comes to fruition in the second half of the year or government reserve news is released, extremely low exchange reserves will trigger a short squeeze with no currency to buy, helping prices hit record highs.

Essentially, the continued outflow of exchange balances is a sign of the transformation of crypto assets from speculative attributes to reserve attributes.

Although the current correction continues due to geopolitical risks, the bottom chip is gradually firming up, and a deep mismatch between supply and demand is brewing.