Coin Metrics analysis: Bitcoin’s rebound is mainly driven by institutions, not regulatory pressure


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The downward trend in the exchange’s bitcoin custody balance may indicate that this round of rise is driven by institutions.

Original title: “Coin Metrics 丨What is the reason for this BTC rise? 》
Written by: Lucas Nuzzi & Coin Metrics Team
Translation: Li Hanbo

An epidemic, followed by the shutdown of global society, then rampant social unrest, then increased political polarization, and then unprecedented currency interventionism.

This is already 2020.

Amidst all these uncertainties and chaos, the Bitcoin bull market is brewing.

In order to explain the rapid rise of Bitcoin to $19,000, two competing theories have emerged. Some speculate that this rally was mainly driven by China’s increased regulatory review, which prevented miners and market participants from selling their bitcoins. Others attribute it to the increase in institutional participation after Bitcoin has gained a lot of recognition from high-profile macro investors.

In this article, we will evaluate the advantages of these claims by using network data.

Did the miners promote this rebound?

In the course of 2020, we closely analyzed the on-chain custody behavior of mining pool operators and their individual miners. We found that the mining pool first keeps the personal mining revenue, and then the benefit is distributed to the individual. Therefore, the supply of transactions from the mining pool to the personal opinion is a good representation of the individual miners’ holdings. This research began with a new series of indicators released in October that can provide views on when these network participants will hoard or sell their mined bitcoins.

In terms of total amount, the number of bitcoins held by mining pool operators has increased during 2020. It is worth noting that there was a sharp spike in April before the halving, followed by a steady increase. On the contrary, the bitcoin held by individual miners has decreased in 2020, and the increase in November was particularly significant.

If, in fact, the liquidity crunch is mainly driven by miners, then one would expect the number of bitcoins held by mining pools (purple) and individual miners (green) to increase. Since individual miners are the liquidity channel for newly issued bitcoins, any supply chain interruption will lead to an increase in their holdings, and the situation seems to be the opposite.

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Another indicator that miners can sell their bitcoins as usual is the total value of bitcoins they send. If miners cannot sell their bitcoins, then the total outflow from their accounts is likely to decline. However, this does not seem to be the case. As of November 21, 809,217 bitcoins have left the miner’s account. At this rate, the total amount of bitcoins sent by miners in November will exceed the average of 1,052,589 bitcoins sent per month throughout the year.

Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

Coupled with the Bitcoin data held by the above miners, there is no significant change in the data outflows by the miners, which negates the hypothesis that the miners cannot sell due to Chinese supervision.

Another factor that attributes the rebound to miners is the size of the Bitcoin market. With a market value of more than 300 billion U.S. dollars, such a large increase is unlikely to be caused by miners alone. After all, miners are not motivated to hoard Bitcoin. They get rewards in fluctuating currencies, and their business needs to pay monthly fees in BTC. Therefore, as Bitcoin issuance decreases, their influence on the market will also decrease.

Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

During November, the total market value of Bitcoin increased by nearly $100 billion. Given that miners have received less than $360 million in funds since November, it is difficult to imagine a situation where only miners have an impact on this. Therefore, any regulatory impact on liquidity may be limited to this, and this degree of impact is too small.

The role of centralized exchanges

Now, let’s take a look at the on-chain trajectory of centralized exchanges and assess its impact on recent gains. This is not only in the context of increasing regulatory pressures in the East, but also considering other factors affecting Western exchanges. .

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Historically, exchanges operating in China have been the main targets of regulators. This time is no exception. On November 2, it was reported that Huobi’s chief operating officer was arrested by the Chinese authorities, but Huobi denied these reports. In the few days after the report, Huobi experienced a large-scale divestment event due to increasing concerns from users. This resulted in 60,000 Bitcoins being withdrawn, and a loss equivalent to 1 billion USD in deposits.

Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

Interestingly, Huobi is not the only exchange that has reduced Bitcoin deposits. In the course of 2020, even if we remove Huobi from the list, the proportion of the total supply of bitcoin held by major exchanges has decreased cumulatively. We noticed that the total amount of Bitcoin held by the major exchanges we support (Bitfinex, BitMEX, Binance, Bitstamp, Bittrex, Gemini, Kraken, and Poloniex) are all decreasing.

Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

Although China’s crackdown on the Bitcoin business has undoubtedly affected Huobi, there may be other factors that have reduced the assets under custody of Western exchanges.

Stable coins may be one of the reasons for this decrease. As a background, the total market value of stablecoins has tripled year-to-date, from USD 5.8 billion in January to USD 17.8 billion as of November. Since one of the greatest benefits of all deposits in a centralized transaction is the deposit of legal currency, stable coins may compete for some of the utility. We discussed some issues in the “Rise of Stablecoins” report, which provides an in-depth review of the driving forces of stablecoin growth.

Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

Another contributing factor may be the rise of Bitcoin anchor coins. Although stablecoins may provide the equivalent of an exchange’s fiat currency, Bitcoin’s anchor currency may compete for other exchange services, such as lending.

Like stablecoins, Wrapped BTC and REN BTC operate on the basis of user deposits of basic assets. Once the asset is deposited, a receipt is issued on the Ethereum smart contract, and the asset can then be used in decentralized finance (DeFi) applications such as decentralized exchanges and lending pools.

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Coin Metrics analysis: Bitcoin's rebound is mainly driven by institutions, not regulatory pressure

The trade-offs between using centralized exchanges and pegged coins are similar. In both cases, the depository no longer has custody of the underlying assets. Although the efficiency of decentralized exchanges on Ethereum is much lower than that of centralized order book exchanges, the former can obtain a large amount of newly issued assets. In addition, holders of the Bitcoin anchor currency can use it as collateral for loans and obtain the “yield” of the Bitcoin held. Therefore, the additional utility of anchor currency assets is likely to lead to a decrease in Bitcoin held by major exchanges.

Differences from 2017

Although the issuance of stablecoins and WBTC may have affected the overall AuC (Assets Under Custody) of centralized exchanges, these are still emerging trends. In order to understand why the exchange AuC (Assets Under Custody) did not follow the rapid rise in prices, let us return to the 2017 bull market.

Relatively speaking, the on-chain trajectory of the bull market in 2017 is completely different from what we see today. That year, the bitcoin held by the exchange almost doubled, and bitcoin rose to $20,000 for the first time.

in conclusion

All in all, our analysis of miner behavior and Huobi’s custody data show that there is no evidence that this rebound is mainly driven by China’s regulatory suppression. The downtrend of AuC (Assets Under Custody) on the exchange may indicate that this rebound is driven by institutions. Taking into account the use of over-the-counter trading channels, the increase in institutional participation will lead to positive price action. Although the trajectory on the chain is limited, this is exactly what we may happen in this bull market.

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