Analyst Karim Helmi and the Coin Metrics team have developed a new methodology for quantifying the assets held by Bitcoin miners. Its peculiarity lies in the separation of the activity of miners and mining pools, which makes it possible to more accurately estimate the reserves of mined coins at their disposal.
ForkLog magazine offers readers a translation of the second part of the article “Following the flows: when do miners sell?” It talks about the impact of miners on the price of bitcoin and the exchanges that receive the most mined coins.
- Contrary to popular belief, the selling pressure from miners is negligible and has almost no effect on Bitcoin and the rest of the market.
- Miners interact mainly with Binance and Huobi exchanges, which have their own pools.
- There is practically no correlation between the fluctuations in the price of bitcoin and the dynamics of the inflow of funds to the exchanges.
Miners are often accused of pressure on the bitcoin price, but these claims are often untenable. Sometimes they are based on imperfect metrics that mix the payouts of the pools with the costs of the miners, which misleads users.
Accurately assessing the impact of miner sales is critical to understanding the market. In the article “Following the Flows: A Look at Online Miner Payments,” Coin Metrics introduced a new methodology for assessing miner activity that structures pool-linked wallets. This approach gives users the ability to distinguish between the activities of pools and miners.
In this article, we will refine our estimates with data on the relationship between miners and exchanges. This will determine when and where miners are selling their coins.
We found that among the many exchanges, miners predominantly prefer Huobi and Binance. It also turned out that the flows of coins from mining-related addresses represent a small percentage of the total amount of funds received on trading platforms. At the time of writing, this figure is 5.5% and can hardly be attributed to the main sources of market volatility.
Indicators of interaction of miners with exchanges
Indicators of inflows, outflows and supply of coins provide useful information about market sentiment, the state of the exchange sector and the decentralization of the network. Due to the differences in the structure, the indicators of the flows of exchanges and miners are built on two different clustering methods, each of which has its own drawbacks.
Exchange flows are estimated using the shared owner entry heuristic. This method is accurate, but requires at least one start address from each exchange. At the same time, coverage is limited to a predetermined set of trading platforms. The results also skew CoinJoin and peeling chains…
To start trading on a centralized platform, users deposit coins, which are deposited with an exchange operator. Mining works in a similar way: market participants share resources to increase the chances of finding a block. Coordination takes place through centralized mining pools. The latter receive freshly mined coins to the address they control, and later distribute the funds among the miners.
Coin Metrics’ miner streams take this structure into account by clustering addresses based on distance from coinbase transactions… Coinbase-rewarded addresses (or 0-hop addresses) are marked as mining pools. Miners are assigned to 1-hop addresses that receive payment from 0-hop.
This approach is less accurate than the shared owner login heuristic. However, it roughly reflects the structure of the mining pool wallets and provides broader coverage.
By combining these two approaches, it is possible to determine where miners deposit their coins. This roughly matches where they sell them.
The flows from the miners to the trading floors correspond in many ways to the aggregated exchange inflows, but there are several key differences. In this context, Binance and Huobi have the most significant role. The share of the latter is significant in the total inflow of funds.
The results look obvious as Huobi and Binance are the only exchanges in the sample that also manage mining pools. Both marketplaces have close relationships with miners, as well as a significant presence in Asia, where most of the cryptocurrency mining capacity is located.
Binance and Huobi also dominate in the context of exchange churns. This suggests that miners are also buying from these trading platforms.
As in the case of inflows, Huobi significantly outperforms other exchanges that do not manage mining pools in terms of outflows. The share of Binance in both cases is roughly comparable.
In the future, flows between miners and trading platforms can be used as an indicator of the approximate geographical distribution of hash power. This metric will be based on the assumption that miners are using exchanges in their region. A more complete coverage of the marketplaces will be required for the picture to be complete.
Determining the size of flows from miners to exchanges
Our methodology can be used both to determine the structure of flows between miners and exchanges, and to estimate their overall scale. In general, mining pools are net depositors of funds on exchanges, although the volume of funds transferred by them daily is small.
As with shared streams, traffic between 1-hop addresses and exchanges is much more intense compared to 0-hop. Although these flows have decreased since peaking in 2016, they have gradually increased since 2018. On the other hand, the USD denominated flows have exceeded previous highs, reflecting the rise in the price of Bitcoin.
Oddly enough, according to our calculations, miners appear to be net buyers. This is probably a methodological artifactdue to many factors. For example, the fact that miners sell coins mainly on over-the-counter (OTC) platforms. This means that the funds are not sent to the exchange immediately.
Another possible factor is the concentration of funds among early miners. The problem can be solved by excluding from the sample those who have not received funds from 0-hop addresses recently.
Finally, payouts from exchange-affiliated mining pools can be combined with withdrawals from trading floors.
Features of streams
Streams between exchanges and miners are more understandable in the context of their constituents. Comparison with aggregated miner flows and aggregate exchange flows will help to get an idea of their scale.
Transfers of funds to trading platforms usually do not exceed 10% of the total volume of miners’ flows, although this figure is historically variable. Deposits on exchanges also make up a negligible percentage of pool flows.
Withdrawals from trading platforms account for an even larger share of the incoming flows of miners. This is in part due to payments from exchange-related mining pools and OTC market sales. Oops to 0-hop addresses usually represent a much smaller fraction of total streams, although this figure has been on the rise lately.
Deposits of miners to exchanges, which in theory should correlate with sales, in percentage terms are usually expressed in single digits over the past five years.
At the time of writing, the figure is about 5.5% of the total proceeds to the exchanges. Since most of the mining of miners is sold on OTC sites, this value may even be somewhat overestimated.
Although the flows between miners and exchanges are volatile, their fluctuations are insignificant in the context of general exchange flows. The movement of funds between 0-hop addresses is also insignificant, so there is no reason to associate Bitcoin price volatility with selling pressure from miners.
Withdrawals by miners represent a larger share of the total volume of outflows from exchanges. Last year this figure remained above 10%. The discrepancy between this figure and the share of miners’ deposits in inflows may be due to pools affiliated with exchanges. The latter can be closely related to the parent company and make payments from matching addresses.
The lack of correlation between the market value of bitcoin and the activity of miners is confirmed by the low correlation between price and deposits. A slight correlation persists during periods of price declines.
The lack of connection between the price and the costs of miners is also traced visually when comparing price changes and miners’ deposits. These values rarely change in tandem, which indicates a low correlation.
The impact of bitcoin miners on the market is still not well understood. However, as we refine our methods of assessing the scale of miners’ activity, we can begin to better understand their role.
Given the small volumes of miner deposits compared to the aggregated flows of exchanges, as well as the lack of correlation between flows and price, there is little reason to believe that these market participants are responsible for the drop in the price of bitcoin.
There is still room for improvement in metrics, including expanding exchange coverage and filtering addresses that have not been mined recently. However, exchange-level flows are consistent with the conventional wisdom that Binance and Huobi are the preferred exchanges for miners.
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