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Institutional support for bitcoin is behind its current rally, notes Coin Metrics in the Dissecting the Bitcoin Bull Market study, after analyzing two hypotheses on the causes of this boom. The first refers to restrictions on existing cryptocurrencies in China, which would have prevented market participants from being able to sell their BTCs. The other hypothesis attributes the upward rally to the approval bitcoin has received from institutional investors.
The study, published on Tuesday 24 November and prepared by Coin Metrics analyst Lucas Nuzzi, “considers the merits of the two narratives, through the use of data from the Bitcoin blockchain”.
Coin Metrics initially exposes the Chinese government’s hostile attitude towards miners and exchanges, reflected in reported news to greater control and control of the two largest Chinese exchanges, Huobi and OKex. The bank accounts of several Shenzen miners would also be blocked.
However, Coin Metrics says there is no strong evidence to support the impact of that news on the bullish cycle and that it did fact-check using certain metrics. These indicators were designed to track the movements of mined BTCssays the study. It can be determined, Coin Metrics argues, whether miners are accumulating or transferring the BTCs they mine.
In the chart below, Coin Metrics shows BTC held by mining pools (purple line), as opposed to BTC held by individual miners (green line).
After the third halving, the pools increased the BTC held while the one held by individual miners decreased. Source: Coin Metrics.
The graph shows that shortly before the halving, Pools dramatically increase the BTC held and have increased since then. Individual miners exhibit the opposite behavior. After the halving, the latter decreased their retained BTC, as seen in the graph.
The study concludes that if there had been an impediment to the sale by individual miners, the held BTC would have to rise, and it isn’t, Coin Metrics says. On the other hand, the following graph more strongly contradicts this assumption. It shows the BTCs sent by the pools (purple line) and by the individual miners (green line).
Flows of BTC from individual pools and miners increased in October and November. Source: Coin Metrics.
When it is observed, the study states, that the outflows of pools and miners do not decrease, the hypothesis of preventing miners from selling their BTCs loses more foundation. As of November 21, 809,217 BTC had been transferred by miners, implying that by the end of November the annual average of 1,052,589 BTC will be exceeded, the study said.
Role of centralized exchanges
Coin Metrics points out that there have been massive withdrawals of BTC in Huobi following the alleged arrest of its COO by the Chinese authorities, but argues that major exchanges need to be examined as well.
There has been a withdrawal of BTC from Huobi, resulting from news of its COO’s arrest of 60,000 BTC, the study notes. But in the main exchanges of the world, Coin Metrics points out, there has also been a decrease in BTC held since the beginning of 2020.
This decrease can be seen in the chart below, which shows the percentage of BTC supply held by the Bitfinex, BitMEX, Binance, Bitstamp, Bittrex, Gemini, Kraken and Poloniex exchanges.
Since the beginning of this year we have noticed the growing trend of BTC held by exchanges. Source: Coin Metrics.
Another report on this decline offers more details on the lows reached. According to the Glassnode analytics platform, the Exchange’s total BTC balance has dropped to levels not seen since August 2018. The total BTC balance went from nearly 3 million at the beginning of the year to 2.3 million on November 21st, according to data from Glassnode.
Coin Metrics says stablecoins may have contributed to this decline, having tripled since the start of the year; they went from $ 5.8 billion in January to $ 17.8 billion in November.
The second half of the year saw an acceleration in the growth of the stablecoin supply. Source: Coin Metrics.
At the same time, Ethereum’s tokenized BTCs saw strong growth in the second half. Tokens like WBTC or RENBTC correspond to blocked BTC, in a 1 to 1 ratio. These have gone from 1.2 million BTC to 1.7 million BTC. Given that tokenized BTCs have the added utility of being able to be used as collateral for loans and “raise interest,” the study says their growth may have contributed to the decline in trading BTCs.
The graph shows the evolution of BTC held on exchanges (purple) and tokenized BTCs in Ethereum (green) in 2020. Source: Coin Metrics.
Differences from the 2017 bitcoin bull run
The study makes major differences from the all-time high of 2017 with the current bitcoin cycle. First of all, he notes, BTC held by exchanges nearly doubled as BTC neared its all-time high, as seen in the chart below.
The BTC held on exchanges increased during the 2017 bullish cycle. Source: Coin Metrics.
The growth of held BTC in 2017 is associated with the 2017 rally being led by retail investors, the study says. He adds that there was less culture at the time about bringing BTC to cold wallets.
In the current rally, the $ 100 billion added to bitcoin’s market cap BTC in the hands of exchanges should have increased, But the opposite happened, the report says. Even considering emerging exchanges like FTX and Deribit and new sources of BTC acquisition like PayPal, the study insists that there must have been an increase in BTC in custody on exchanges.
This suggests that there are other forces at play. Media reported on Nov. 21 that assets under custody of Coinbase’s institutional unit have grown from $ 6 billion to $ 20 billion so far in the fourth quarter of 2020. If this rally were driven by the influx of BTC from institutional investors , this would explain the trend of the assets held by the stock exchanges.
Coin metrics.
Fundamentally, the study says, institutional investors operate in OTC markets, outside of trading.
In its conclusions, the study points out that there is no evidence to suggest that bitcoin’s current rally is caused by cryptocurrency restrictions in China and suggests that the downward trend of BTC held on the exchange is due to the growing institutional adoption of bitcoin.
As reported by CriptoNoticias, the largest institutional investment fund in bitcoin, managed by Grayscale, has exceeded half a million BTC in custody, with a value of more than 9,000 million dollars.
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