Detailed analysis of on-chain data: Hashrate and coin price halved, are Bitcoin miners doing well?

Note: The original author is glassnode data analyst CHECKMATE.

Bitcoin markets have been in a slump since the sell-off in mid-May, with BTC falling to a low of $28,999 earlier last week before rebounding to an intraday high of $35,487.

As mining power continues to disappear from the network during the largest mining hardware migration in history, some Bitcoin holders appear to have once again chosen to capitulate at the low point. With the Bitcoin market experiencing its largest absolute loss in history last week, we looked at the groups that were most affected.

We also assess the overall demand dynamics of institutions, such as Grayscale’s GBTC, various ETF products, and balances on the Coinbase exchange.

Second round of surrender

After breaking a new record for absolute losses (in dollar terms) in May, markets capitulated again last week, this time recording a new record of losses of $3.45 billion.

Note: Losses are realized on-chain when coins that were last moved (UTXO created) at a higher price are spent again (UTXO destroyed) at a lower price, assuming the holder sold at a loss. Note that as Bitcoin market valuation increases, larger absolute gains and losses may occur.

This means that a large amount of BTC was moved underwater last week. Note that almost all long-term holders (LTH) are profitable, and their transfers actually offset a net loss of about $383 million (which means a total realized loss of $3.833 billion!). Only 2.44% of the circulating supply currently held by long-term holders (LTH) is in a loss.

On a more relative basis, we can look at the Spent Output Profit Rate (SOPR) metric to see how the second capitulation compares on a relative basis. We look at the SOPR metric for two groups: long term holders and short term holders. These two metrics have the same calculation, but require slightly different interpretations:

The long-term holder SOPR (left, orange) can be thought of as a realized profit multiple, and an LTH-SOPR value of 1.95 means that the total profit realized by long-term holders is 195% (based on the current price, the average cost is about $16,300).

The short-term holder SOPR (right, blue) typically oscillates around 1.0 as recently moved coins are re-used during market volatility, but a drop to values ​​well below 1.0 (and a sustained drop there) would indicate that this group has realized significant losses.

Last week, the price drop seemed to create some panic among both long-term (LTH) and short-term (STH) holders, as evidenced by the volatility of LTH-SOPR and the deep capitulation of STH-SOPR. The realized losses of short-term holders (STH) are only slightly lower than the capitulation event in March 2020, and long-term holders (LTH) were willing to spend coins at an average cost basis of $9,200 to $16,300 last week, indicating a high degree of uncertainty.

However, despite some evidence that long-term holders (LTH) who sold coins were panic selling, almost all indicators based on "lifespan" that track coin age continue to decline towards pre-bull run levels. Based on the above information, our interpretation is:

1. Some long-term holders (LTH) spent their coins during the market volatility, most likely for panic reasons based on the cost basis.

2. Most long term holders (LTH) did not spend their coins, so the average age of coins moved remained very young (despite the market realizing a net loss of $3.45 billion).

3. The selling pressure mainly comes from short-term holders (STH), who almost hold coins that are in a loss-making state. 23.5% of all circulating supply is held by short-term holders (STH), while short-term holders (STH) hold only 3.4% of profitable coins.

Miners' selling pressure

As Bitcoin hashrate undergoes the largest migration in history, the market has been speculating on the magnitude of miner selling pressure, which could create resistance to Bitcoin market prices. There are two main factors that could lead to increased miner selling pressure:

1. Revenues have fallen sharply, with the recent price drop of around 50% for Bitcoin causing miners to sell more coins to cover the same fiat expenses.

2. The logistical costs and risks that miners incur in relocating or liquidating their mining equipment, which requires miners to liquidate their BTC holdings. These expenses can last for several months.

To begin our analysis, we can evaluate the changes in the total miner revenue (7DMA). The data shows that the miner market revenue has fallen by about 65.5% since March and April, and the current 7-day average mining revenue is about $20.73 million/day, but it is still 154% higher than when Bitcoin halved in 2020.

During the same period, mining difficulty increased by only 23.6%. The mismatch between revenue and difficulty is mainly due to the global semiconductor shortage, which has limited miners' ability to expand their operations. In practice, this means that Bitcoin mining has been very profitable during 2021, and some previously obsolete hardware has become profitable. This means that miners can sell fewer coins to cover costs and can build up miners' reserves.

Despite a 154% increase in 7-day average revenue, Bitcoin mining difficulty increased by 23.6%. With a large percentage of hashrate currently offline and in migration, the next difficulty adjustment is estimated to be -25%. Therefore, miners who continue to operate may see higher profits in the coming weeks unless prices correct further or migration hashrate comes back online.

This largely suggests that operating miners are unlikely to engage in excessive forced selling (Point 1), and therefore liquidations of Chinese miners are more likely to be the main source of selling pressure (Point 2).

Therefore, the second question is whether miners are liquidating their coffers to cover the risks and costs of relocating computing power. Here, we look at the total BTC balance held in miner wallets and find that since the low point on January 27, miners have added a total of 10,000 BTC to their coffers, which accounts for 7.6% of all coins mined by miners during this period, indicating that miners sold approximately 92.4% of BTC during this period.

We can also see a total spend of 7,000 BTC that occurred in early June, which was likely a miner or group of miners liquidating coins in preparation for migration.

We can also track the rate at which miners are sending BTC to exchanges to assess relative selling pressure. Here, we use the 14-day moving average to make this assessment.

Compared with 2020 and the first quarter of 2021, the selling pressure of miners on exchanges is actually declining significantly, and the current miner coins flowing into exchanges have steadily declined from 500 BTC/day in March to less than 200 BTC/day in June.

We also reviewed the balances of the OTC platforms we monitor, which represent another major venue for matching miner coins with large buyers. In 2021, the BTC balance of OTC platforms has been gradually "declining", and each decline phase is usually associated with changes in market trends. From April to June, the total OTC balance remained between 6,000 BTC and 8,000 BTC, with a net outflow of about 1,134 BTC in the past two weeks.

Slowing demand from institutions

A major driver of the rise in Bitcoin prices in 2020 and 2021 has been the narrative and actual growth in institutional demand. One of the biggest factors has been Grayscale’s GBTC Trust, which has been observed to trade at a significant premium in 2020 and early 2021.

Since February 2021, the GBTC product has reversed, with its negative premium reaching a maximum of -21.23% in mid-May. After the subsequent sell-off, the GBTC negative premium began to shrink, hovering between a low of -14.44% and a high of -4.83% this week.

Grayscale’s GBTC Trust currently holds more than 651,500 BTC, accounting for 3.475% of the circulating Bitcoin supply.

Additionally, there are two Bitcoin ETF products in Canada that could also provide insight into institutional demand:

1. Purpose Bitcoin ETF

2. 3iQ Digital Asset Management QBTC ETF

The current BTC holdings managed by the Purpose ETF continue to grow, with a net inflow of 3,929 BTC since May 15. This represents an inflow of 95.83 BTC per day, and the total Bitcoin holdings managed by the ETF have now reached 21,597 BTC.

Meanwhile, the QBTC ETF has seen a large net outflow of BTC over the past two months, with its total BTC holdings falling by 10,483 BTC, bringing ETH’s current total Bitcoin holdings down to 12,975 BTC.

Therefore, Purpose ETF has now surpassed QBTC ETF’s AUM. Combined, these two Bitcoin ETFs have seen a total outflow of 8,037 BTC in the last month.

On the institutional side, we can also observe the net change in Coinbase’s holdings, which is the preferred venue for US institutions during the bull market. After a period of net outflows since December 2020, Coinbase’s BTC balance has flattened significantly.

After observing data such as the GBTC premium, net outflows from the combined Purpose and QBTC ETFs, and stagnant Coinbase balances, we can see that institutional demand seems to still be somewhat sluggish.