How do retail investors, veterans and institutions contribute value to exchanges?

Author: Chainalysis; Compiler: Deep Tide TechFlow

Introduction

The cryptocurrency market is becoming increasingly complex.

Retail investors, whales, institutions and trading platforms.... Different roles have different trading behaviors, and identifying and understanding these behaviors is more important than ever.

This report from Chainalysis provides in-depth data analysis and unique observations, revealing user behavior patterns related to all trading platforms, showing how they affect the development of the entire crypto market.

The report conducted an in-depth study of multiple dimensions such as wallet type, activity, total value of inflow and outflow trading platforms, and user churn rate. Taking the popular FTX as an example, it subdivided the various user groups whose funds flowed into FTX, and Their behavior was dissected in depth.

These data help us understand the value contribution of various users to the trading platform, as well as their activity and churn rate. If you are an institution or trading platform operator, this report will help you better understand your users and optimize your operating strategies; if you are an investor in cryptocurrency, this report will help you better understand Market dynamics to make more informed investment decisions.

Summary of key data

**1 User stratification:**According to the age and asset holdings of the wallet, users can be divided into 6 categories: early retail, early professional, early institutional, late retail, late professional, and late institutional. The total number of retail user (retail) addresses is hundreds of millions, but the total amount of assets is not as good as that of institutions.

**2 Inflow of funds into CEX: **The total value sent by late institutional wallets accounted for the highest proportion of 23.6%, followed by late professional and early retail wallets, accounting for 18.8% and 19.0% respectively.

**3 Fund flow in FTX: **FTX has mostly retail investors, but the average weekly inflow of retail investors is only 700 US dollars. Although the number of institutional users is small, the average weekly capital inflow is as high as 2 million US dollars.

**4 User churn rate: **The churn rate of late professional and late retail wallets in CEX is low, less than 1%; on the contrary, the churn rate of retail accounts is as high as 15%.

Overall Market Conditions

In 2023, the cryptocurrency market unfreezes, and the price of Bitcoin rises by more than 50%. But exchanges face challenges, with the number of active centralized exchanges dropping to 640 from 750 in early 2022. As competition from decentralized exchanges (DEXes) intensifies, trading volumes on CEXs have further declined.

Despite this, the number of cryptocurrency users is still growing. Looking at the number of personal wallets (also known as non-custodial wallets) that are active or holding balances on all Chainalysis supported blockchains over the past five years, there is a clear trend in user growth.

Note from Shenchao: The figure below shows that the number of personal active wallets has increased from about 50 million in 2018 to more than 300 million now. However, the original report did not disclose the calculation method of such addresses, such as whether to deduplicate, etc.

Comparing the two, when the decline of CEX meets the gradual growth of addresses, it means that trading platforms need to segment their users more and focus on attracting and retaining users who will bring the greatest value to their business.

User Hierarchy

The report is based on all the wallets that can be collected, considering the age of the wallet and the asset holdings in it,** divides the users into 6 parts: early retail, early professional, early institutional, late retail, late professional and late institutional. **

Shenchao Note: Retail refers to retail investors in the popular sense. Professional users may be understood as giant whales.

According to the above stratification, the statistics and summary of the assets in the Bitcoin and Ethereum networks in these 6 types of wallets are as follows:

You can see the expected result: the total number of retail addresses is large, but the amount of assets added up is not as good as that of institutions.

In addition, most of the current weekly active wallets are late retail users. Such users have a short time to create a wallet and have a low balance in a single wallet. The number of active professional wallets in the late stage is also higher than that in early retail, showing that more relatively large amounts of funds have invested in cryptocurrencies in recent years.

User's capital flow in CEX

Collectively, the relatively new cohort of late-stage institutional and late-capacity wallets account for the majority of current bitcoin and ethereum holdings in individual wallets. But the more important question for this study is, how do these groups interact with trading platforms?

Centralized exchanges typically make money from transaction fees. While we don't have the necessary data insight into the order books of exchanges to calculate the fees generated by each group - we only have on-chain data.

But we can assume that the total amount transferred to the trading platform on-chain by each group roughly matches the transaction fees generated by each group. Cryptocurrencies are often sent from personal wallets to exchanges to be traded, rather than held, so this seems like a reasonable assumption.

Calculated along this line of thought, since the beginning of 2021, late-stage institutional wallets have accounted for the largest share of the total value sent to centralized exchanges, at 23.6%. Late professional and early retail wallets followed with 18.8% and 19.0% respectively.

Overall, value sent to exchanges was roughly even across groups for most of the quarter, with the exception of late retail wallets and early institutional wallets, which accounted for 11.4% and 11.9% of the total value sent to exchanges during this time period, respectively.

The reasons for this lag vary between the two groups - late retail wallets because they have the least capital compared to other groups, and early institutional wallets because they have the lowest share of all active wallets.

Example Analysis: User Fund Flow in FTX

Take FTX, for example, which was one of the most popular trading platforms in the industry until then, despite its closure in November 2022. Interestingly, FTX’s user base doesn’t quite fit the aforementioned overall wallet landscape.

In absolute terms, late retail wallets make up the vast majority of the user base in FTX, and late professional wallets are the second largest group almost every week.

This can actually explain to a certain extent that most of the people who send money to FTX are retail investors.

Meanwhile, two small, super-wealthy groups of late and early institutions make up the smallest share of FTX’s user base — but that’s not the case if we evaluate these groups by their inflow volume:

• Late institutional wallets dominate the total funds flowing into FTX;

• Despite accounting for only 0.1% of the average weekly user base, inflows to late institutional wallets accounted for 30.0% of the total during the time period studied;

• Late Pro wallets came in second with 21.4% of FTX received value - which is more in line with their 17.6% of total FTX users;

• Late retail wallets accounted for only 7.6% of total funds inflows, despite accounting for 75.8% of total weekly average users.

But at the beginning of the time period - from January 2021 to mid-April 2021, the inflow share of late institutional wallets is often the lowest, and it is not until the fall of 2021 that they firmly become the largest user group. This pattern may be due to more institutional investors entering the cryptocurrency market during the price increase in 2021, but it may also hint at the efforts of the FTX team in attracting these high-value users.

If the value contribution of the above 6 types of users to the trading platform is graded, it can be intuitively found that institutions are still in the first echelon, and the total inflow of funds is significantly higher than that of retail investors.

These data show that although the number of users of late-stage institutions and late-stage professional wallets is small, the value they bring to the trading platform is very large.

The user churn rate is also an important indicator for evaluating the value of users to the trading platform. We found that early retail wallets had much higher churn than any other category at 15.7% per week, while late professional and late retail wallets had the lowest churn at 0.6% and 0.4%, respectively.

However, if you consider the funds that a wallet flows into the trading platform throughout its life cycle, you can better calculate the expected value that the trading platform can obtain from users.

In this report, the expected inflow of a wallet over its entire life cycle = weekly average inflow/weekly average loss rate.

Calculated in this way, institutions are expected to contribute more value to the trading platform (the loss rate is low, and there is continuous capital inflow every week).

Summarize

These insights are extremely valuable for trading platform user acquisition and retention strategies as well as product development.

For example, FTX hopes to acquire new users by airdropping rewards to individual wallets active on other exchanges. By dividing target wallets into these subdivisions, FTX can precisely offer different rewards to each wallet based on the expected lifetime inflow of the subdivision each wallet belongs to.

Similarly, if FTX wanted to increase the retention rate of its regular users, it might conclude that it should focus on the early retail segments, since even small improvements to their extremely high churn rates would bring excess returns, considering their high average weekly inflows. Regardless of the specifics, the ability to assign value to each wallet will help FTX market to its users and potential users more effectively than otherwise.

At the same time, we also believe that this report has revealed to a certain extent the pattern of the entire encryption market trading ecology. The trading volume of retail investors is small but the number of people is large, and the turnover rate is high; the opposite is true for large investors. **For individuals, a little more understanding of the characteristics and behavior of different counterparties can also make them more calm in the dangerous encryption world.