This was discovered in the MSTR sub because Saylor was withdrawing MSTR BTC from CB prime and posted about freezing your BTC by putting it into cold storage.
Where does Saylor get MSTR's BTC? We can visualize it with Arkham Intelligence
In this first image, we can see that Arkham Intelligence has been able to identify several hundred of MSTRs BTC associated addresses.
According to Arkhams known and associated addresses, MSTR only have custody of 70K BTC in its own addresses. I felt it necessary to look at 3 of the 4 unattached. They all are dead ends with no other associated inflows. This led me to my next discovery:
IBIT is buying all of its BTC almost exclusively off of Coinbase Prime and it is also storing almost all of its BTC on Coinbase Prime.
I've shared a good deal in the last few days about Exchange Reserves. I know many people speak of ETFs buying 'over the counter', but it is worth noting that Coinbase Prime IS the go-to Over the Counter source for big firms, like MSTR and IBIT. This led me to wonder, where does Coinbase Prime get their deposits? Since we now know that Coinbase Prime is where most of the ETFs are holding their coins in custody, where do they get it from?
Aside from that one wallet with Greyscale, I also found that they acquired tens of thousands from the US Government DOJ some of the Silk Road coins.
Most of the transfers of most of the wallets, however, or just an endless recircling of Coinbase Prime Wallets moving to Coinbase Prime wallets and back again.
At the behest of another reader, I took some time to read through the SEC filings. On Page 53 of their 2023 Filings from Q1 2024, we can read:
"We route orders through third-party trading venues in connection with our Coinbase Prime trading service. The loss or failure of any such trading venues may adversely affect our business. In connection with our Prime trading service, we routinely route customer orders to third-party exchanges or other trading venues.
In connection with these activities, we generally hold cash and other crypto assets with such third-party exchanges or other trading venues in order to effect customer orders. If we were to experience a disruption in our access to these third-party exchanges and trading venues, our Prime trading service could be adversely affected to the extent that we are limited in our ability to execute order flow for our Prime customers.
In addition, while we have policies and procedures to help mitigate our risks related to routing orders through third-party trading venues, if any of these third-party trading venues experience any technical, legal, regulatory or other adverse events, such as shutdowns, delays, system failures, suspension of withdrawals, illiquidity, insolvency, or loss of customer assets, we might not be able to fully recover the cash and other crypto assets that we have deposited with these third parties, and these risks may be heightened following the 2022 Events. For example, in connection with the 2022 Events, we were not able to recover an immaterial amount of cash deposited at FTX. As a result, our business, operating results and financial condition could be adversely affected."
This is important, especially when you start to understand how much the exchanges interdepend on one another. We see it right here in their official filings, and you can see it when you start messing around with blockchain explorers like Arkham do you realize how they may be trying to play a shell game and why liquidity is so important to them, and how MSTR removing liquidity is a threat.
There is only 1 miner present on the inflows for Coinbase Prime. This means that they are primarily getting their BTC from existing Coinbase Prime wallets or Coinbase Wallets. Having explored several of them, I can attest that there is a never ending web of interchanges within their own Wallets. On the Red, outflowing side, we can see a few major recipients, including at least $500 million sent directly to Coinbase. This is in line with the policy I quoted above. They are having to pull in liquidity from Coinbase Prime to make up for the depletion of Exchange Reserves. They are able to disguise this by outlining it in their SEC filings as normal business practices for liquidity.
Even Greyscale has been a recipient as of late to tens of millions in value. Perhaps they custody for them as well. You can explore this model here: Arkham Link. Be warned, tweaking any of the variables may crash Chrome. It happened a few times for me.
So this brings us to my conclusion of why Saylor is withdrawing his funds away from Coinbase Prime. Firstly, it isn't the sole source of his BTC. He buys from some miners, a few third party suppliers, and seemingly some smaller players. But at his scale he will probably have to continue to use Coinbase Prime, due to their connections. They need revenue, as their filings indicate they have debt to service, including some Senior Convertible Notes coming due in a year or so. Not unfamiliar territory to us at MSTR.
If more people and especially entities started withdrawing off the exchanges, I think we would see an implosion of the house of cards built up around thousands of redundant wallets that bundle and shuffle coins throughout several exchanges. I am now more convinced of Coinbase Tomfoolery.
Saylor made the right move. This should increase your confidence in him and the direction of the company. He is removing counterparty Risk from the equation.
