Bitcoin in Motion: Is BTC Price Inversely Proportional to Mempool Size?

Editor's note: This article comes from Cointelegraph Chinese (ID: CointelegraphChina), author: TIAGO VIDAL.

After a strong rebound from $3,775 to $6,450, Bitcoin (BTC) has been fluctuating in a narrow range, making it difficult for the price to break through the $6,400 and $6,850 resistance levels. Despite the current pullback, technical indicators such as the "stock-to-flow ratio model" and the continued growth of the network's computing power indicate that investors have initially regained a glimmer of confidence.
Another factor worth considering is Bitcoin’s mempool size, as it can also provide some insight into how buyers and sellers react during these uncertain times.

Cryptocurrency Market Weekly Report Source: Coin360

The mempool is where all unconfirmed Bitcoin transactions sit until all confirmations are posted. The larger the mempool, the longer it will take to confirm a transaction because there will be more blocks to confirm (and more electricity).

If a blockage occurs in the memory pool due to abnormal transaction data waiting to be confirmed, the probability of higher transaction fees to speed up transaction confirmation is higher.

The size of Bitcoin’s memory pool reached a record high of over 130MB/block in January 2018, just days after Bitcoin hit an all-time high of $20,000.

Bitcoin mempool size (MB/block) from June 2016 to March 2020 Source: Blockchain.com

This could indicate a relationship between the number of transactions awaiting confirmation and the price of Bitcoin. If that were the case, the relationship would be inverted during a correction like the one investors are facing now.

Bitcoin mempool size and price show inverse relationship in 2020

Considering the 60% drop in Bitcoin between February 19 and March 13, we find that the correlation between Bitcoin’s mempool size and its price is negative, at -41.2%. Considering that this relationship was barely significant throughout 2020, at 2.34%, this is clearly a very high level.

A 100% correlation means that Bitcoin price and mempool size move in exactly the same direction, while a -100% correlation means that they are inversely correlated. A 0% correlation means that there is no relationship between the variables at all.

The current situation is similar to that in 2016

During the 2016 correction, when Bitcoin price dropped by more than 20%, we found the same negative correlation between mempool size and Bitcoin price, although the values ​​differed greatly — with a very high negative correlation in one period (-83.1%) and a lower one in the other (-4.6%).

During the six periods of 20% price declines in 2017 and 2018, we found uncertainty in the correlations, making it impossible to draw reliable conclusions.

Correlation between Bitcoin price and memory pool size during different correction periods in 2017

However, if we look closely at the two periods in the second half of 2017 when Bitcoin ultimately hit its all-time high price, both periods show an inverse relationship between the size of the mempool and the price of Bitcoin.

November 8 to November 12 showed a very high negative correlation (-85.9%), while December 17 to December 25 had a much smaller negative correlation (-5.6%).

Correlation between Bitcoin price and its mempool size during the 2018 correction

Positive correlation in 2019

In 2019, four of the five correction periods identified showed a positive correlation between Bitcoin’s mempool size and its price, but the last correction period showed a slight negative correlation.

Correlation between Bitcoin price and its mempool size in 2019

Positive correlation throughout the year

When we consider the relationship on a yearly basis instead of analyzing only correction periods, we find a clear trend with a positive correlation between mempool size and Bitcoin price.

In addition, the correlation was high in 2017 (80.8%) and 2018 (72.2%), although no conclusive trend could be drawn when analyzing the revision period within these years. A positive correlation trend between the two variables was also observed in 2016 (26.3%) and 2019 (9.5%), although the magnitude was not significant. In 2020, this relationship was almost non-existent (2.34%).

“There are a lot of BTC being transferred”

Last week, the size of the mempool also increased amid a drop in Bitcoin’s price. Looking ahead, we may see a continuation of this inverse relationship, creating uncertainty for Bitcoin’s price in the short term.

As Cointelegraph market analyst filbfilb recently noted:

“When I knew there were so many BTC being transferred, I couldn’t wait too long.”

The amount of Bitcoin that may have moved in and out of exchanges over the last week has further fueled suspicions about the inverse relationship between the mempool and Bitcoin’s price.

Mempool size data from Blockchain.com. Prices from coinmarketcap.com.

The views and ideas expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph. Every investment and trading involves risk. You should conduct your own independent research when making investment decisions.