How strongly Bitcoin miners influence the market

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.

Key points

  • Within the framework of the new methodology, addresses associated with miners and pools are analyzed separately, stocks and activity of market participants are estimated.
  • This method has advantages over previous approaches to analyzing miner’s costs. They focused on the activity of the pool operator, and not on the actions of the miners.
  • The supply of coins concentrated at miners is gradually decreasing, and net flows from their addresses are stabilizing. Over time, the influence exerted by miners on the market decreases, but it is still significant.

Miners and the market

In addition to securing the network, miners have a huge impact on market dynamics. By receiving freshly released bitcoins, rather than buying them, miners are the direct net sellers of the asset. This effect is exacerbated by the fact that the operating costs of miners, among which electricity and rent prevail, are denominated in fiat currency. In this case, the income is denominated in bitcoin.

The new approach, using previously unavailable information, analyzes the activity of miners and their motives, and also estimates the impact of their costs on the market.

On-chain data indicate a gradual decline in the influence of miners on the network. However, these market participants remain key players in the ecosystem with access to large amounts of funds.

Summing up the market supply of coins

To calculate the miner flows, let’s start by grouping all addresses that received payment directly from coinbase transactions. Let’s mark them as 0-hop addresses. The addresses that received payments from the 0-hop sample will be labeled 1-hop.

In a typical situation, pools first receive the block reward, then it is distributed among the miners. 0-hop addresses are usually associated with pools, 1-hop addresses are associated with miners. For this reason, existing systems trying to draw conclusions about the behavior of miners based on the analysis of flows from 0-hop addresses are theoretically untenable. They are not evaluating what they should be evaluating, focusing on the activity of the pool operator.

Of course, labeling miners and pools based on distance from a coinbase transaction is not a perfect method. Especially when applied to the early stages of the network’s development, when solo mining and alternative pool models were more popular.

Since the first mining pool, Slush Pool, mined the debut block in December 2010, observations prior to that date should only be used as a reference. In addition, addresses of miners who have not received funds from 0-hop addresses are not marked. Overall, however, such a heuristic represents a significant improvement over current approaches and is intended to more accurately reflect general trends.

Miners, especially active in the early years of the network, control a significant amount of bitcoins. The number of coins at 0-hop and 1-hop addresses has generally declined throughout the history of the first cryptocurrency. In the second half of 2019 and the first half of 2020, on the eve of halving, there was a significant change in trend.

Miners have accumulated an additional 383,000 BTC during this period. The effect was mostly limited to 1-hop addresses, and the supply concentrated in the 0-hop sample remained virtually unchanged.

Dynamics of Bitcoin stocks at 0-hop and 1-hop addresses. Source: Coin Metrics.

There are several spikes in the supply concentrated among miners. Such bursts are often associated with addresses with significant balances, mining their first block or making their first interaction with a 0-hop address.

The most notable of these leaps occurred on August 16, 2012, when the whale holding over half a million bitcoins received a portion of the coinbase reward for block # 194,256.

New entrants are also responsible for increasing miner-controlled supply ahead of the third halving.

The dynamics of the supply growth associated with new addresses of miners. Data: Coin Metrics.

ue to inflation, the gradual decline in miner-controlled reserves becomes more significant when viewed in the context of total emissions. This is in line with the trend towards a more even distribution of bitcoin supply.

This is also consistent with the widespread adoption of the pooling model. The latter implies a low probability that non-mining addresses will be mistakenly labeled 1-hop.

However, even today, miners and pools control a significant portion of the total Bitcoin supply.

The share of miners’ reserves in the total supply of bitcoin. Source: Coin Metrics.

Pools and payments

The inflow of funds to and from these two groups of addresses is another powerful on-chain signal. Since pools usually receive coinbase rewards immediately, 0-hop threads are a useful indicator of mining pool activity.

Since the early days of the Bitcoin network, inflows and outflows of funds from 0-hop addresses have been characterized by a downward trend. The exception is a few bursts of activity, the most notable of which is associated with the aforementioned whale.

Bitcoin streams associated with 0-hop addresses. Source: Coin Metrics.

Miner revenues or block reward receipts account for the bulk of the flow of funds to 0-hop addresses. Although miners’ income is volatile in the short term due to fluctuations in fees and blocks mined, it is relatively stable over the long term.

Bitcoin miner revenues and flows associated with 0-hop addresses. Source: Coin Metrics.

Inflows and outflows are closely correlated with each other. However, outflows are much more volatile, since miners can withdraw funds from mining pool wallets at any time. Consequences of halving 2016 and 2020

Bitcoin-denominated streams associated with 0-hop addresses. Source: Coin Metrics.

Miner funds

0-hop streams are useful for tracking payments from pool operators. In the context of today’s standard wallet architecture, they do not cover transactions carried out directly by miners.

In most cases, block rewards go to an address controlled by the pool operator. The latter stores these coins until miners receive regular payments or request a withdrawal of funds.

Bitcoin-denominated streams associated with 1-hop addresses. Source: Coin Metrics.

In the context of the pooling model, the 1-hop address movement of funds more accurately reflects the costs of miners. This report is one of the first attempts to analyze such flows. Due to the much larger number of matching addresses and the high velocity of money circulation, these flows are much larger and more volatile compared to 0-hop.

For analyzing the movement of funds in the early stages of network development (before pools became the most common method of mining), 0-hop streams may be a more suitable tool. However, even today, analysis of 1-hop streams only gives an approximate estimate of miner activity. This is due to differences in the wallet pool structures, which could cause exchange addresses to be mistakenly included in these flows. But in general, such a model gives a more holistic view of the costs of miners in modern conditions.

As with 0-hop, 1-hop inflows and outflows are closely related. Since block rewards represent only a small fraction of 1-hop proceeds, inflows and outflows are very volatile in this case. The influence of halving on this category of streams is less obvious.

Bitcoin-denominated streams associated with 1-hop addresses. Source: Coin Metrics.

Over the last year or so, miner-related flows have increased slightly, indicating increased activity. As net flows are relatively stable and become less volatile, the increased activity does not seem to be reflected in the increased impact on the network.

The close relationship between inflows and outflows indicates that most miners tend to immediately move coins in their possession. Given that derivatives exchanges and fiat lending services are primarily custodian platforms, miners can use financial instruments to hedge bitcoin price risks.

However, the results of a study by the Center for Alternative Finance at the University of Cambridge indicate that the adoption rate of such instruments is low – miners generally prefer to hold significant reserves in bitcoin. Significant amounts of turnover may indicate that miners are active market participants, selling most of the mined coins.

Through the prism of the dollar

Since the costs, profits and losses of miners are denominated in dollars, it is advisable to view their flows through the prism of the value denominated in US currency. Since 0-hop streams are mainly composed of block rewards, the dollar value graph is very similar to the miner’s revenue graph.

USD denominated flows associated with 0-hop addresses. Source: Coin Metrics.

The USD-denominated miner’s flow chart resembles the pool flow chart on a larger scale. This is due to their interdependence with the price of bitcoin. However, unlike pool threads, miner threads have an upward trend, which even briefly exceeded the 2017 high at the end of 2019. This indicates a lot of miner activity on the network.

Dollar-denominated flows associated with 1-hop addresses. Source: Coin Metrics.

Where are we now?

On-chain metrics measuring flows and stocks indicate a gradual decline in the influence of miners on the network. However, miner-related activity is still significant, with these market participants controlling a significant share of the Bitcoin market supply.

As the only direct recipients of the issue, miners and pools have an impact on the network that is not easy to quantify. The metrics in this article only give a superficial understanding of the behavior of miners.

In the future, we hope to analyze the flows from miners to exchanges, more accurately assessing their impact on the market. We also plan to explore an active offer focused on miner addresses, weeding out coins lost in the early stages of the network’s development, as well as taking into account the wallet structure of individual pools. This will allow for a more detailed analysis of the behavior of miners.