Research | What determines miners' holdings and trading behavior? (Part 1)

Miners and Markets

In addition to their role in ensuring network security, miners also have a profound impact on Bitcoin's market dynamics. Since they can receive newly mined Bitcoins instead of purchasing them, miners are natural net sellers of assets. This effect is further exacerbated by the fact that miners' operating expenses, mainly electricity and rent, are mainly denominated in currency, while their income is earned in Bitcoin.

Using previously unavailable data on the accounts interacting with these addresses, this paper examines miners’ activities and assesses their motivations and impact in selling Bitcoin.

Although on-chain data shows that miners’ influence on the network is gradually declining, they are still key players in the ecosystem. As the supply held by miners generally decreases over time, the inflow and outflow of funds for miners and mining pools are suppressed by the continuous halving.

Supply

To calculate the flow of funds for miners, first we aggregate all addresses that received payments from coinbase transactions and label these addresses as 0-hop addresses. Then we label any address that received payments from an address in this group as a 1-hop address.

Due to the way mining pool wallets are usually structured, mining pools initially receive block rewards and then distribute them to miners, so 0-hop addresses generally represent mining pools and 1-hop addresses generally represent miners. For this reason, existing research methods that attempt to infer miner behavior from the spending of 0-hop addresses are theoretically unsound and do not study the targets that 0-hop addresses point to. Instead, they evaluate the activities of mining pool operators.

Admittedly, labeling miners and mining pools based on their distance from the coinbase transaction is an imperfect technique. This is especially true when applied to early networks, where solo mining and the Eligius mining pool model are more popular. Because the first mining pool, Slush Pool, mined its first block in December 2010, calculations before this date can only be used as a guide. In addition, miner addresses that have not received funds from a 0-hop address will not be labeled. Overall, however, this heuristic is a significant improvement over the current state of the art and should accurately capture general trends.

Miners, especially those active in the early days of the network, control a large amount of Bitcoin. Throughout the history of the network, the number of Bitcoins held by 0- and 1-hop addresses has generally declined. However, in the second half of 2019 and the first half of 2020, this trend reversed significantly before the halving, with miners accumulating 383,000 BTC from trough to peak. This result is mainly limited to 1-hop addresses, with the supply of 0-hop addresses roughly flat - so most of this accumulation will still not be discovered by previous estimation techniques.

Several spikes in the supply held by miners are visible. These spikes are usually caused by addresses with large balances that mined their first block or had their first interaction with a previously marked 0-hop address. The most prominent of these spikes occurred on August 16, 2012, when a whale holding over 500,000 BTC received a partial coinbase transaction reward in block 194,256. New entrants were also responsible for the increase in the supply controlled by miners before this year’s halving.

The gradual reduction in supply held by miners and mining pools is more significant from the perspective of total supply due to inflation. This reduction is consistent with a general increase in the distribution of Bitcoin's supply. It is also consistent with the greater prevalence of mining pools, which means that non-miner addresses are less likely to be overly marked as 1-hop addresses.

Even today, though, miners and mining pools control a large portion of the total Bitcoin supply.

Mining Pools and Rewards

The flow of funds to and from miners and mining pools is another strong on-chain signal. Since mining pools are often the direct recipients of coinbase transaction rewards, the flow of 0-hop addresses is a useful indicator of mining pool activity. Aside from a few spikes, most notably those attributed to the whales mentioned above, the amount of Bitcoin flowing in and out of 0-hop addresses has been trending downward since the early days of the Bitcoin network.

Miner income, or income from block rewards, accounts for the majority of funds flowing into 0-hop addresses. Although miner income varies in the short term due to fluctuations in fees and the number of mined blocks, it is relatively stable over time.

While inflows and outflows are strongly correlated, outflows are much more volatile because they are less influenced by the protocol's established rules and miners can choose when to withdraw funds from pool wallets. The impact of the 2016 and 2020 halvings was clear, with both miners and pools seeing a reduction in the amount of flows. Since the 2020 halving, the value of inflows has generally exceeded the value of outflows, contrary to historical norms.

Original source: https://coinmetrics.io/following-flows-a-look-at-miners-on-chain-payments/