Did miners sell off during the May 19 market crash?

The Bitcoin market just experienced its largest deleveraging event since the March 2020 sell-off. The market traded down more than 47% from a weekly high of $59,463 to a low of $31,327. This weekly candle now has the largest total price range in history, reaching a high of $28,136.

Price action was completely revised in what can only be described as a collective panic, as summarized by @nlw, due to the severe suppression of Bitcoin. The sell-off was so severe that it raised the question in many minds whether the 2021 bull run was still underway. This week, we will review the scale of this correction and the reactions of various entities observable on-chain.

An event that went down in history

The scale of on-chain realized losses this week has surpassed all previous sell-offs, including the sell-offs in March 2020, November 2018, and January-February 2018 that ended the last bull run.

The chart below shows the USD value of realized losses on sold cryptocurrencies and shows that a new total of $4.53 billion in losses was set on May 19. This is over 300% higher than the previous peaks in March 2020 and February/April 2021 and is the peak of a total realized weekly loss of $14.2 billion.

Even taking into account the sold profitable coins, this panic event still caused a large amount of liquidation losses, which was huge. On May 19, the on-chain net loss exceeded $2.56 billion, a figure that was 185% larger than the COVID sell-off in March 2020. The chart below shows that this sell-off came after a strong period of net profit taking (green spike).

This suggests that a large portion of the market was taken aback by the event.

These net losses on-chain have resulted in a decrease in the liquidation ceiling as coins purchased at high prices fall in value. Liquidation market cap fell by $7 billion (-1.8%) this week from its all-time high of $377 billion.

Looking at the number of unique on-chain entities that are now in profit, we can see that the current FUD has reduced the number of profitable entities to 76%. This means that 24% of all on-chain entities currently hold UTXOs that are underwater. In the context of a bull market, this compares to three periods in 2011, 2013, and 2016. This metric also highlights the proportion of the market that bought cryptocurrencies at high prices, so they may become panic sellers.

Sell-side analysis

There are three main groups of entities that are likely to generate sell-side supply.

1. Losing cryptocurrency holders, who are mainly buyers in the past 3-4 months.

2. Crypto holders who are in profit and may think that a macro top has been reached.

3. Miners who need to sell to cover costs or are forced to sell due to new Chinese regulations.

There is no doubt that a large portion of the recent selling activity is driven by short-term holders, those who own cryptocurrencies purchased within the past 6 months. The selling output time period shows that the peaks before and during the sell-off are significantly higher than the typical baseline, especially in the time periods of owning 1-3 million and 3-6 million cryptocurrencies.

If we compare this to the equivalent spend by long term investors, specifically those holding 1-3 years (buyers of the last cycle), we see the opposite. Holders of 1-3 years actually sold their coins earlier, most likely rotating capital to capture ETH’s price performance at the time.

However, during this panic sell-off, spending on 1-3 year old coins actually decreased significantly and as a percentage of total activity, which suggests that veterans are not panic selling and are not rushing to exit.

A major question that remains is how big the unrealized losses are, or in other words, how many underwater coins can still be panic-sold? We examined the relative unrealized loss metric, which shows the ratio between the total underwater value and the current market capitalization.

Using this metric, we can see that about 9.0% to 9.5% of the current market cap ($700 billion) has unrealized losses, which equates to about $65 billion in underwater value. Despite this being a historic panic event, the value of on-chain underwater positions is actually relatively small relative to the size of the market. We can compare this to the relative unrealized losses of 44% in March 2020 and over 114% in November 2018.

Note that buying a cryptocurrency higher before a major sell-off has essentially "stored value" at a higher market cap. After the sell-off, the new market cap is lower, so it is possible to realize a relative unrealized loss of >100%.

Across the market, the unrealized net profit and loss indicator has retreated below 0.5, indicating that the market is currently holding profitable coins accounting for 50% of Bitcoin's market value. This level has acted as support in the previous three bull cycles, and this is actually the first time the market has touched it in 2021.

However, if we filter out short-term holders, we can see that a major panic has occurred. Short-term holders are currently holding coins with a total unrealized loss of -33.8% of market cap. This compares to the most extreme declines in Bitcoin history, including:

The first bull market top in 2013

Three events during the 2014-15 bear market

Four events in the 2018 bear market

The panic in March 2020

On the miner side, anecdotal evidence suggests that selling pressure from miners may increase in the short term due to Chinese mining regulation.

Are miners selling Bitcoin? Some have panic-sold, others have no choice. Not everyone has access to Western escrow sites. There is also more uncertainty around current RMB OTC channels. At the end of the day, fiat is needed to cover operating costs.

— Mustafa Yilham (@MustafaYilham) May 23, 2021

Looking at miners’ cryptocurrency spending shows that while miner-to-exchange flows have risen, from 100 BTC/day to 300 BTC/day, this is still a relatively small fraction of the ~900 BTC issued daily.

The miners’ net position change indicator confirms this situation. We can see that the accumulation volume has dropped slightly this week, but the ratio of “mined and held” cryptocurrencies relative to “mined and sold” cryptocurrencies still accounts for a larger share. It remains to be seen whether miners start to sell more cryptocurrencies as these changes unfold.

Exchanges and Derivatives

Finally, we investigate the impact of this week on exchange flows, balances, and leveraged derivatives markets.

In the weeks leading up to and during the sell-off, there was a clear increase in net deposits on exchanges. On May 17, the peak of net inflows soared to +30k BTC/day. At the same time, the size of outflows has been steadily increasing, with the lower the price, indicating that there are still late buyers even in the market.

An interesting observation is the fork in the exchange market going on in terms of which exchanges are increasing their BTC balances. Balances on most exchanges have actually been relatively flat or declining over the past few weeks. Aside from a small increase during this week’s sell-off, these exchanges have actually been on an uninterrupted downward trend in balances since March 2020.

However, there are three exchanges that have received almost all of the observed net inflows. Binance, Bittrex, and Bitfinex. Balances on these three exchanges have been increasing throughout 2021, though Binance leads with the lion’s share of inflows. However, during this sell-off, all three exchanges saw a significant increase in the BTC balances they hold.

Given that all three exchanges serve clients outside the U.S., this could indicate different market reactions in different jurisdictions. Another explanation is that Binance, in particular, hosts a large number of trading markets, derivatives catalogs, and is the gateway to the Binance Smart Chain, making it a preferred venue for retail speculation recently.

Finally, in derivatives markets, open interest in Bitcoin futures has seen a massive drop from the ATH set in April. Open interest across all futures markets has fallen by over $16.4 billion (a 60% drop) from its peak and is now back to levels last seen in February 2021.

Options markets saw a similarly sharp decline, with the total amount of outstanding contracts falling 52% from its peak to $6.4 billion, returning to levels last seen in February.

Overall, this elimination of speculation and leverage is a healthy and necessary process as it eliminates excessive speculation and forced sellers, allowing more organic price action to return downstream.