Glassnode Report: Selling pressure from Bitcoin miners is coming!

The bitcoin market began to show signs of selling in mid-May this year, but the selling pressure did not reach the current trading lows. Last week, bitcoin fell to $28,993, but has now recovered to around $35,000.

After the largest-scale mining machine shutdown in history, the computing power of the entire Bitcoin network plummeted, and miners' selling pressure followed. Industry insiders speculated that they needed to sell BTC to pay for the operating costs of mining machine transfers. In addition, last week's Grayscale Bitcoin Trust Fund GBTC, various exchange-traded fund (ETF) products, and Coinbase's digital currency holdings are also worth paying attention to.

Second round of "surrender"

In May, Bitcoin price capitulated for the first time this year, and just last week (the last week of June), the market capitulated again, with the highest “on-chain losses” ever ($3.45 billion): losses occur on-chain when Bitcoin that was last moved at a higher price (creating UTXO) is spent again at a lower price (destroying UTXO). (Note that as Bitcoin market valuations increase, larger dollar-denominated losses are likely.)

This means that a large amount of Bitcoin that was "underwater" was sold this week. It is worth noting that almost all long-term holders have made profits. Their "spending" actually offset a net loss of $383 million, and the total realized loss amount is as high as $38.33! Currently, the unrealized loss of Bitcoin held by long-term holders accounts for only 2.44%.

On a more relative basis, we can actually focus on another indicator: Spent Output Profit Ratio (SOPR), which allows us to compare the recent setbacks of Bitcoin on a relative basis. We can analyze the Spent Output Profit Ratio indicator for two groups of people:

1. Long-Term Holder (LTH);

2. Short-Term Holder (STH).

Although the two indicators are calculated in the same way, they may need to be interpreted differently:

* SOPR of long-term holders (left, orange in the figure below), realized profits have increased because they are usually in a profitable state. As shown in the figure, the profit rate of spent output of long-term holders is 1.95, which means that overall, they have realized a profit of 195%, but on the other hand, the profit rate of spent output of long-term holders has also begun to fluctuate greatly recently, although the fluctuation is lower than that of short-term holders SOPR;

* Short-term holder SOPR (blue, right) As shown in the figure, the short-term holder's spent output profit rate usually fluctuates around 1.0. This is because the market has been volatile recently, especially recently. You will find that the recent short-term holder SORP values ​​are all below 1, which means that they should have suffered considerable losses recently.

As shown by the increased volatility of the long-term holder-SOPR and the deep "capitulation" of the short-term holder-SOPR, the price of Bitcoin has indeed entered a downward trend this week. Overall, this market decline seems to have caused a certain degree of panic among both long-term and short-term holders. The realized losses of short-term holders are only slightly lower than the market crash caused by the new coronavirus epidemic in March 2020. The average cost that long-term holders are now willing to spend is basically a digital currency that fluctuates between $920 and $1,630, which all indicate that there is a high degree of uncertainty in the market.

However, despite some evidence of panic selling by long-term holders, nearly all metrics tracking the “lifespan” of cryptocurrencies continue to break down toward pre-bull run levels. This could be explained by the following:

1. Some long-term holders sold their digital currencies during market volatility, and the reason for selling at this time may be based on panic caused by cost spread.

2. Most long-term holders did not choose to sell the digital currencies they held because the digital currencies that have been transferred are still very "young" (i.e., they have not been mined or held for a long time), although the market's realized net loss has reached US$3.45 billion.

3. Market selling pressure mainly comes from short-term holders. Among all the circulating supply held by them, about 23.5% have unrealised losses, while only 3.4% have realized profits.

The miners' selling pressure is coming

As the largest migration of Bitcoin’s hashrate has occurred in history, the market has been speculating on the magnitude of miner selling pressure, which is likely to create resistance to price increases. For now, there are two main factors that may lead to increased miner selling pressure:

1. The sharp decline in miners’ income, coupled with the recent halving of Bitcoin prices, has forced miners to sell more Bitcoins to exchange for legal tender to cover operating costs;

2. Miners have to liquidate the Bitcoin they already hold in their inventory due to relocation or liquidation of mining equipment, and pay for the logistics costs and risk hedging incurred by exchanging them for legal currency. These cost expenditures may continue for several months.

In order to present the analysis results more intuitively, we evaluated the changes in the total income of miners (7-day average). In fact, the income of Bitcoin miners remained relatively stable in March and April, but then the income of the Bitcoin mining market fell by about 65.5%. The current 7-day average mining income is about 20.73 million US dollars/day, but even so, it is still 154% higher than when the Bitcoin block reward was halved in May 2020.

Bitcoin Miner Revenue Real-time Chart

On the other hand, Bitcoin mining difficulty increased by only 23.6% during the same period. The mismatch between miners’ revenue and mining difficulty is mainly due to the global shortage of semiconductor chips, which has limited miners’ ability to expand their operations. In this case, it means that mining Bitcoin in the first half of 2021 will be very profitable, and Bitcoin mining hardware that was supposed to be obsolete can still continue to be profitable. In other words, miners only need to sell fewer Bitcoins to cover operating costs and can build their own Bitcoin inventory reserves.

Despite a 154% increase in 7-day average revenue, the difficulty of Bitcoin mining has increased by 23.6%. As a large number of mining machines are currently "offline" and "transferred", the next Bitcoin mining difficulty adjustment is expected to be large (-25%). Therefore, unless the price of Bitcoin falls further or the "offline" and "transferred" miners can quickly resume online mining in the short term, miners who insist on continuing to operate may get higher profits in the coming weeks.

Bitcoin mining difficulty real-time chart

To a large extent, this shows that Bitcoin miners who insist on continuing operations are unlikely to "excessively" or "forced" to sell their Bitcoin holdings (corresponding to the first reason above). Therefore, Chinese miners are more likely to be the current main source of sellers. They need to liquidate their inventory of Bitcoin to pay for mining machine transfer and operating costs (corresponding to the second reason above).

Therefore, the next question is whether Bitcoin miners are liquidating their inventory to cover the risks and costs of relocating mining machines. Here, let's first look at the total balance held in miners' wallets. It turns out that since the price low of Bitcoin on January 27, miners have added a total of 10,000 Bitcoins to their inventory, accounting for 7.6% of the total amount of mined Bitcoin, indicating that miners have distributed 92.4% of their "inventory" during this period.

We can also see that in early June, a total of about 7,000 bitcoins were spent from miners' wallets. This is likely a miner or a group of miners starting to liquidate their bitcoins in preparation for migrating mining machines.

Bitcoin miner wallet balance real-time chart

We also track the rate at which miners send Bitcoin to exchanges to assess relative selling pressure. Here, we use a 14-day moving average to compare data over the same period as the difficulty adjustment window.

Compared to the whole of 2020 and the first quarter of 2021, during these two periods, the amount of Bitcoin sold by miners on digital currency exchanges basically remained at 300 to 500 per day. The current selling pressure from miners on exchanges is actually significantly lower than in these two periods. In March, the amount of Bitcoin flowing into digital currency exchanges by miners was about 500 per day, but in June it dropped to 200 per day.

Real-time chart of Bitcoin flows from miners to digital currency exchanges

We also looked at some of the Bitcoin situations on some monitored OTC trading platforms, which is also another major channel for miners to sell Bitcoin. Generally speaking, OTC trading is closely related to changes in market trends. Throughout 2021, the volume of Bitcoin OTC trading has shown a "downward" trend: from April to June, the volume of Bitcoin OTC trading has remained between 8,000 and 6,000, but in the past two weeks, the net outflow of Bitcoin in the OTC market has been only about 1,134.

OTC Bitcoin Live Chart

Institutional demand begins to slow

The main driver of the rise in Bitcoin prices in 2020 and 2021 was increased institutional demand, one of the biggest factors being the one-way inflow of Bitcoin into Grayscale's Bitcoin Trust Fund GBTC. As many traders tried to arbitrage, we observed that GBTC remained at a high premium in 2020 and early 2021.

However, since February 2021, GBTC has not been able to maintain its high premium status, and they have to trade at a discount to net asset value. In mid-May, GBTC's premium rate has reached -21.23%. However, as the market sell-off intensified, GBTC's discount began to rise again. In the last week of June, the Grayscale Bitcoin Trust's net asset value trading discount rate was between a low of -14.44% and a high of -4.83%.

Currently, Grayscale's Bitcoin Trust Fund GBTC holds more than 651,500 bitcoins, accounting for 3.475% of the total supply of Bitcoin in circulation.

Grayscale Bitcoin Trust Fund GBTC Premium Rate Real-time Chart

It is worth mentioning that Canada also has two Bitcoin exchange-traded fund products:

1. The Purpose Bitcoin ETF;

2. The 3iQ Digital Asset Management QBTC ETF.

Analyzing these two products can also further understand recent institutional demand. The total number of bitcoins managed by The Purpose Bitcoin ETF has continued to grow. Since May 15, the net inflow has reached 3,929 BTC, which is equivalent to a daily inflow of 95.83 BTC (calculated on a 7-day week basis). The total number of bitcoins held by the Bitcoin exchange-traded fund has now reached 21,597.

The Purpose Bitcoin ETF Bitcoin holdings real-time chart

At the same time, The 3iQ Digital Asset Management QBTC ETF has seen a large outflow of Bitcoin in the past two months (outflow reached 10,483 BTC), and the total holdings have also dropped significantly, which has reduced the current Bitcoin holdings of the Bitcoin exchange-traded fund to 12,975.

In terms of quantity, the total amount of Bitcoin managed by The Purpose Bitcoin ETF has exceeded that of The 3iQ Digital Asset Management QBTC ETF. However, if the two are analyzed together, the outflow of Bitcoin from these two Bitcoin exchange-traded funds in June reached 8,037.

The 3iQ Digital Asset Management QBTC ETF Bitcoin holdings real-time chart

Finally, on the institutional side, we can observe the net change in the balance of tokens held by Coinbase, which is the preferred trading venue for US institutional investors during the bull market. Since December 2020, Coinbase has experienced a period of continuous outflow of BTC, but now the change in Coinbase's Bitcoin balance has clearly flattened.

Real-time chart of Bitcoin holdings on digital currency exchanges

Through analysis, we found that the premium rate of Grayscale Bitcoin Trust Fund GBTC narrowed, the total net outflow of Bitcoin from The 3iQ Digital Asset Management QBTC ETF and The Purpose Bitcoin ETF increased, and the growth of Coinbase Bitcoin balance stopped. Therefore, it can be basically asserted that institutional demand seems to be in a relatively low state at this stage, and market recovery remains to be seen.