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 behavior patterns of all users related to trading platforms, demonstrating how they influence the development of the entire crypto market.
The report explores various dimensions such as wallet types, activity levels, total value of inflows and outflows to trading platforms, and user churn rates. It uses FTX as a case study, segmenting different user groups contributing funds to FTX and analyzing their behaviors in depth.
This data helps us understand the value contribution, activity levels, and churn rates of various types of users to trading platforms. If you are an institution or operator of a trading platform, this report will help you better understand your users and optimize your operational strategy. If you are a cryptocurrency investor, this report will help you better understand market dynamics and make wiser investment decisions.
Key Data Summary
1. User Segmentation: Users can be divided into six categories based on wallet age and asset holdings - Early Retail, Early Professional, Early Institutional, Late Retail, Late Professional, and Late Institutional. Retail users (individual investors) have billions of addresses, but their combined asset quantity is less than that of institutions.
2. Inflows to CEX (Centralized Exchange): Late Institutional wallets account for the highest proportion of total value sent, at 23.6%. Late Professional and Early Retail wallets follow closely, accounting for 18.8% and 19.0%, respectively.
3. Fund Flow in FTX: FTX has mostly retail users, but the average weekly inflow from retail users is only $700. In contrast, although institutions make up a smaller percentage, they have an average weekly inflow of $2 million.
4. User Churn Rate: Late Professional and Late Retail wallets have low churn rates in CEX, less than 1%; in contrast, the churn rate for retail users is as high as 15%.
Overall Market Situation
In 2023, the cryptocurrency market thawed, and the price of Bitcoin rose by over 50%. However, trading platforms faced challenges as the number of active centralized platforms decreased from 750 in early 2022 to 640. With increasing competition from decentralized exchanges (DEXes), the trading volume of CEXes further declined.
Nevertheless, the number of cryptocurrency users continues to grow. Looking at the number of individual wallets (also known as non-custodial wallets) that have been active or hold balances on all Chainalysis-supported blockchains over the past five years, the user growth trend is apparent.
Editor's Note: The chart below shows that the number of active individual wallets has increased from around 50 million in 2018 to over 300 million now. However, the original report did not disclose the calculation method for such addresses, such as whether deduplication was performed.
In contrast, when the decline of CEX encounters the gradually increasing number of addresses, it means that trading platforms need to further segment their users and focus on attracting and retaining users who will bring the greatest value to their business.
User Segmentation
Based on all collectible wallets, considering the age of the wallet and the amount of assets held in it, the report divides users into 6 categories: Early Retail, Early Professional, Early Institutional, Late Retail, Late Professional, and Late Institutional.
Editor's Note: Retail refers to individual users, while professional users can be understood as whales.
Based on the above segmentation, the total number of bitcoin and ethereum assets in these 6 types of wallets is summarized as follows:
As expected, the number of retail addresses is higher, but the total value of assets is lower than that of institutions.
In addition, most of the active wallets on a weekly basis are late-stage retail users. These users have a short wallet creation time and low balance in individual wallets. The number of active late-stage professional wallets is also greater than early-stage retail wallets, indicating that there has been more relatively large-scale investment in cryptocurrencies in recent years.
Funds Flow in CEX
Overall, the relatively newer late-stage institutions and late-stage whales wallet group account for the majority of the Bitcoin and Ethereum holdings in individual wallets. But the more important question for this study is how these groups interact with trading platforms?
Centralized trading platforms typically profit from trading fees. Although we do not have the necessary data to calculate the fees generated by each group by inspecting the order books of trading platforms - we only have on-chain data.
However, we can assume that the total amount transferred into trading platforms by each group on-chain roughly aligns with the transaction fees generated by each group. Cryptocurrencies are usually sent from individual wallets to trading platforms for trading, not for holding, so this seems like a reasonable assumption.
Based on this approach, since the beginning of 2021, late-stage institutional wallets have accounted for the largest share of the total value sent to centralized trading platforms, at 23.6%. Late-stage professional and early-stage retail wallets follow closely behind, accounting for 18.8% and 19.0% respectively.
Overall, for most quarters, the value sent to trading platforms by each group is relatively balanced, except for late-stage retail wallets and early-stage institutional wallets, which account for 11.4% and 11.9% of the total value sent to trading platforms during this time period respectively.
These two groups have different reasons for this lag - late-stage retail wallets because they have the least capital compared to other groups, and early-stage institutional wallets because they have the lowest share of all active wallets.
Case Study: User Funds Flow in FTX
Taking FTX as an example, although it collapsed in November 2022, it was one of the most popular trading platforms in the industry before that. Interestingly, the user base of FTX does not completely conform to the overall wallet pattern mentioned above.
In terms of absolute quantity, late-stage retail wallets constitute the vast majority of the user base in FTX, and late-stage professional wallets are almost always the second-largest group on a weekly basis.
This actually to some extent illustrates that the majority of people who send money to FTX are retail investors.
At the same time, the small and super wealthy groups of late-stage and early-stage institutions occupy the smallest share of FTX's user base. However, if we evaluate these groups based on the volume of incoming funds, the situation is different:
- Late-stage institutional wallets dominate the total funds flowing into FTX;
- Although they only account for 0.1% of the average weekly user count, the amount of funds flowing into late-stage institutional wallets accounts for 30.0% of the total during the research period;
- Late-stage professional wallets rank second, accounting for 21.4% of the value received by FTX, which is more consistent with them accounting for 17.6% of the total number of FTX users;
- The total share of funds flowing into late-stage retail wallets is only 7.6%, although they account for 75.8% of the average weekly user count.
However, in the initial period of the time range - from January 2021 to mid-April 2021, the share of funds flowing into late-stage institutional wallets was often the lowest, until the autumn of 2021, when they firmly became the largest user group. This pattern may be due to more institutional investors entering the cryptocurrency market during the price increase process in 2021, but it may also imply FTX's efforts in attracting these high-value users.
If we classify the value contribution of the above 6 types of users to the trading platform, it can be intuitively observed that institutions are still in the top tier, and their total amount of incoming funds is significantly higher than that of retail investors.
These data show that although the number of late-stage institutional and professional wallets is small, the value they bring to the trading platform is very significant.
User churn rate is also an important indicator for evaluating the value of users on the trading platform. We found that the churn rate of early-stage retail wallets is much higher than any other category, at 15.7% per week, while the churn rates of late-stage professional and retail wallets are the lowest, at 0.6% and 0.4%, respectively.
And if you consider the funds that a wallet can bring to the trading platform throughout its lifecycle, you can better calculate the expected value that the trading platform can obtain from users.
In this report, the expected amount of funds that a wallet can bring throughout its lifecycle = average weekly inflow of funds / average weekly attrition rate.
By calculating in this way, institutions can contribute more value to the trading platform (low attrition rate, continuous inflow of funds every week).
Summary
These insights are valuable for user acquisition and retention strategies, as well as product development for trading platforms.
For example, FTX hopes to acquire new users by airdropping rewards to individual wallets that are active on other trading platforms. By dividing the target wallets into these segments, FTX can provide different rewards to each wallet based on the expected lifetime inflow of each segment.
Similarly, if FTX wants to improve the retention rate of its regular users, it may conclude that it should focus on early retail segments, as even a slight improvement in their high attrition rate would bring excess returns, considering their high average weekly inflow. Regardless of the specific situation, the ability to determine value for each wallet will help FTX market to its users and potential users more effectively than other methods.
At the same time, we also believe that this report reveals to some extent the overall pattern of the trading ecosystem in the cryptocurrency market. Retail traders have small trading volume but large numbers, and a high attrition rate; while large traders are the opposite. For individuals, having a better understanding of the characteristics and behaviors of different trading counterparts will also enable them to navigate the risky cryptocurrency world with greater ease.
