Hedge Fund Paradigma Capital put miners share of the Bitcoin market volume into context while exploring potential relationships with price returns.
- Miner’s share of Bitcoin on-chain volume usually represents less than 0.01% of total on-chain volume
- Little to no relationship was found between miners moving bitcoin to exchanges and bitcoin price returns
What impact miners have on the Bitcoin spot price has been a relationship which been highly speculated. Most theories are built on the idea of miners putting downward pressure on price when they sell their newly minted bitcoin on the market to meet payments due in fiat.
Several strategies have been built around this idea such as identifying what wallets belong to miners and monitoring when funds move from these wallets to exchanges. However, recent research published by Crypto-assets hedge fund Paradigma Capital highlights that the impact miners have on the Bitcoin price market is likely negligible.
MINERS SHARE OF ON-CHAIN VOLUME
While Bitcoin miners controlled 100% of on-chain transaction volume when the Bitcoin network initially launched, this share rapidly reduced to less than 1% within the first three years. The miner share of on-chain volume (MSV) can be expected to further decline as more users adopt Bitcoin and the block subsidy continues to decline.
The MSV will be, in practice, an inverse measure of on-chain volume (gradually becoming smaller, and adjusting abruptly every halving).”
Today, if we assume miners receive 1800 bitcoin per day plus 2% in transaction fees received from Bitcoin users, miners would have roughly 1840 bitcoin to sell on the market each day. With adjusted transfer volume typically above 500,000 bitcoin per day, this would suggest MSV is usually less than 0.01%.
This can likely be expected to further decline as more users adopt Bitcoin and the block subsidy continues to halve. Miners share of Bitcoin movement volume further decreases when off-chain volume is taken into account as illustrated by the below snapshot of volumes on the 1st of June 2019.
The above analysis does not consider the influence miners may have on bitcoin price through their participation in derivative markets. When futures prices are trading above spot prices, miners may hedge future price movement risk by selling futures contracts to lock in a profit.
The leveraged nature of futures products means that such positions can have a significant impact on price. However, the sheer size of the bitcoin derivatives markets likely means that miners have no greater influence than speculators or market makers.
CORRELATION ANALYSIS EXPLORING MINER OUTFLOWS TO EXCHANGES
When Paradigma carried out a correlation analysis exploring the relationship between miner outflows to exchanges and price returns of bitcoins, little association was found and any association that was found was statistically insignificant. Instead of continuing with complicated analysis possibly data mining some form of relationship, the Paradigma team note that the absence of a correlation relationship is strong evidence that causation is unlikely to exist in any relationship that may be found as the result of deeper analysis.
There’s a myriad of methods that could be applied to more fully characterise these relationships— information coefficient tests, conditional distributions, etc. But the near absence of apparent correlation makes it much more unlikely that any causation exists.”
AN OPPOSING OUTLOOK FROM BLOCKWARE SOLUTIONS CEO
MinerUpdate jumped on a call with the CEO of Blockware Solutions Matt D’Souza to discuss the findings of the Paradigma study. Matt strongly disagrees that miners have little impact on the market given that they represent new capital coming into the Bitcoin market.
“Trading volume is just churn. New capital in and capital out is what really moves the markets. The long-term trends and intermediate-term trends are all about new cash.”Matt D’Souza
Such a theory would be supported by some on-chain analysts. Analysts such as Willy Woo and the team at CoinMetrics have devised metrics to assess the value of the new capital bitcoin miners are bringing into the market.
A popular market theory that has been recently circulating has been to estimate the average miner cost of production and use this as a rough approximation of where Bitcoin market bottoms will be. Analyst FilbFilb popularized this theory when he used such cost of production analysis to closely estimate the 2018 market bottom. This theory is based on the idea that miners will be disincentivised to sell as bitcoin price approaches the cost of production.
Matt proposes that the relationship works in the opposite manner. When profit margins are high, bitcoin miners are selling less of their mined bitcoin to meet costs. However, when profit margins are squeezed, miners are forced to sell a greater percentage of the bitcoin they generate to meet costs, applying extra selling pressure on prices.
The Blockware Solutions team is currently producing research exploring the relationship between market prices and cost of production. We will be keeping in touch with the team to keep our readers informed about insights from their research. Matt wrapped up our phone call by emphasizing the importance of the miner’s supply-side in relation to the upcoming halving.
The halving is so bullish because the buy-side will stay the same but the supply-side will get cut in half, meaning the sell pressure gets cut in half, and the market anticipates this. Post halving there will be half the sell pressure from miners. The inefficient miners will get blown out and the efficient miners will enjoy healthier margins. Half the sell pressure on the Bitcoin Network will be removed creating an upward shift in the equilibrium price of Bitcoin”