An on-chain analysis said bitcoin's exchange supply squeeze has effectively ended.

On Aug. 17, blockchain outlet U.Today reported that on-chain analytics firm Santiment said exchange supply rebounded quickly after investors returned 84 percent of bitcoin they had previously withdrawn to exchanges' liquidity wallets during the first three weeks of August.

Bitcoin traded in a tight range around $63,500 during the period. Santiment's exchange supply indicator showed exchange holdings fell to 1,304,000 BTC on July 28 from 1,337,000 BTC on June 12. About 33,000 BTC left exchanges over about six weeks, a 2.5 percent decline.

As of Aug. 16, exchange balances had quickly recovered to 1,332,000 BTC. That was 5,200 BTC below the June peak, and the pace of new inflows is now stable.

The report also said the trend should be viewed separately from demand for spot bitcoin exchange-traded funds (ETFs). Santiment said new ETF share issuance is completely separate from public exchange addresses because issuers buy bitcoin directly from miners and long-term holders through over-the-counter (OTC) trades. It said the restoration of exchange liquidity is proceeding regardless of institutional inflows.

The market sees the inflows as a defensive move led by retail investors. It said pressure building in exchange balances reflects caution ahead of external macroeconomic factors and the release of U.S. Federal Reserve meeting minutes, with retail investors building liquidatable holdings on exchanges in preparation for potential selling.

Santiment said the current situation shows a liquidity buffer has formed on exchanges. It said that means more standby supply could be sold quickly during profit-taking or market unease. In the short term, expectations that a supply squeeze will immediately push prices higher have weakened, and an assessment has emerged that the balance of supply and demand has shifted entirely to sellers.

Institutional accumulation of bitcoin has not stopped. While large institutions continue to build positions in closed OTC markets, retail holdings are increasing on exchanges. That structure shows that even the same bitcoin demand can have different effects on exchange prices.

That means the key near-term market question is whether the inflows to exchanges will translate into actual selling. For now, an immediate price surge scenario based on a lack of bitcoin on exchanges has lost momentum.