We chat with Karim Helmy of Coin Metrics about their new data series on miner spending behavior and what Bitcoiners can learn from it
Disclaimer: the contents of this article are purely for informational purposes and should not be construed as financial advice.
For a while now, there have been some cryptocurrency analytics platforms that share public data on what they claim is Bitcoin miner spending behavior. However, what those platforms were really showing was Bitcoin mining pool spending behavior—a very different thing.
We’ve tried to clarify this point whenever possible, but there was still a lot of confusion from Bitcoiners about what the metrics really showed. Fortunately, there’s now a project that’s actually measuring Bitcoin miner spending behavior with their new line of metrics.
Coin Metrics recently published Following Flows: A Look at Miners’ On-Chain Payments, in which they explain findings when analyzing transactions to and from addresses 1 hop away from the coinbase transaction. In other words, transactions that are coming from actual miners, not just payouts from mining pools.
In this article, we’re teaming up with Karim to provide more insights into what we can learn from this data, discuss when and why miners sell their Bitcoin, and chat about the future of their miner flows analysis.
Bitcoin miners have a huge impact on liquidity, so analyzing their flows gives you a better understanding of the markets. What we see on a macro level is that their influence on the network is gradually declining, with net outflows becoming less volatile over time. Given that several halvings have now reduced issuance dramatically, this lines up with what we’d expect.
By tracking miners’ flows and holdings, you can also see some interesting short-term trends, like how miners accumulated over 380,000 BTC in the year leading up in the halving. This buildup was mostly confined to 1-hop addresses, so previous methodologies would’ve missed it. On a micro level, this could be a useful trading indicator, though we haven’t tested it out for that purpose.
The short answer is that miners sell to cover costs and take profits. Miners’ expenses, including electricity and rent, are mostly fiat-denominated, but their revenues are earned in bitcoin. This leaves them exposed to the price of bitcoin, which can heavily impact their profitability.
Below you can see an example of a 24-month cash flow analysis for a hypothetical Bitcoin mining operation with 7000 TH/s of hashrate paying an electricity fee of $0.03/kWh. With difficulty rising (+5%/month) faster than price (+2%/month) in the example, the net profit per month is an increasingly smaller percentage of mining revenue over time. This means that the miner would need to be selling a larger portion of their BTC mined each month to cover costs.
This is what Bitcoin miner cash flows look like the majority of the time. The exception is intense bull markets, during which network difficulty rises less quickly than price and miners are able to cover costs with a smaller portion of the coins they mine each month. Depending on their fund management strategies and the amount of BTC exposure they’re willing to carry, though, some miners may actually sell more coins at these times to realize the gains on coins mined and held through the bear market.
This model is confirmed by the analysis, which shows that 1-hop inflows and outflows have typically tracked one another closely and that the spread between them has generally tightened.
Surveys show that most miners don’t employ advanced hedging strategies, meaning holding and selling are how they get to their desired level of risk. I expect we’ll see more adoption of loans and derivatives in the not-so-distant future. However, even then, selling coins will continue to be how miners realize their profits.
The next thing we’re looking into on this front is crossing these metrics over with our exchange flows to see how much bitcoin miners are sending to exchanges. This gives us a clearer picture of how much miners are selling and a better idea of how they impact the market. We’re also looking at following flows between mining pools, which can be a good way to discover proxy pools and detect hidden centralization.
In addition to flows, Coin Metrics is developing several other mining-related metrics. We’re looking at the network’s hashpower distribution across pools, the amount of revenue miners are taking in per hash, and the changing role transaction fees play. We’re especially interested in quantifying how new tools like Stratum V2 and next-generation hardware affect decentralization and miner profitability.
If you’re interested in following our work, you should subscribe to our newsletter, State of the Network! Make sure to check out the article, and feel free to drop me a line on Twitter if you have any questions about miner flows!
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