Are miners selling Bitcoin during the crash?

Original title: "Glassnode Data Insights丨Did Miners Sell Off in the May 19 Market Crash?"

Original Author: Glassnode

Original Source: Crypto Valley

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

The price trend has been completely revised, which can only be described as a collective panic, as summarized by @nlw, the main reason comes from 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 ongoing. This week, we will review the scale of this correction and the reactions of various entities observable on-chain.

An Event for the Records

The scale of realized losses on-chain this week has surpassed all previous sell-offs, including those in March 2020, November 2018, and the January-February 2018 sell-off 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 19th. This is more than 300% higher than 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 profit coins that were sold, this panic event still caused a large amount of liquidation losses, by a large margin. On May 19, the on-chain net loss exceeded 2.56 billion US dollars, a figure that is 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 (green spike).

This shows that a large part of the market was spooked by this event.

These net losses on-chain have led to a drop in the liquidation cap as coins bought at high prices have fallen in price. Liquidation cap has dropped by $7 billion (-1.8%) this week from its all-time high of $377 billion.

Looking at the number of unique entities on-chain that are now in profit, we can see that the current FUD has reduced 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 cryptocurrencies bought at high prices in the market, so they may become panic sellers.

Sell-side Analysis

There are three main groups of entities that have the potential to generate sell-side supply.

1. Losing-money cryptocurrency holders, who have primarily been buyers over the past 3-4 months.

2. Profitable cryptocurrency holders who may believe 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 cryptocurrency that was purchased within the past 6 months. The time periods of sold output show that, particularly in the 1m-3m and 3m-6m cryptocurrency time periods, the peaks before and during the sell-off were significantly higher than the typical baseline.

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

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

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

Using this metric, we can see that about 9.0% to 9.5% of the current market cap ($700 billion) is in 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 higher cryptocurrencies before a major sell-off has essentially “stored value” at higher market caps. 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 net unrealized profit and loss indicator has retraced below 0.5, indicating that the market is now holding profitable coins representing 50% of Bitcoin's market cap. This level has acted as support in the three previous 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’s history, including:

· The first bull market top in 2013

· Three events in the 2014-15 bear market

· Four events in the 2018 bear market

· The March 2020 panic

On the miner side, anecdotal evidence suggests that miner selling pressure could 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 flows to exchanges have risen, from 100 BTC/day to 300 BTC/day, this is still a relatively small portion of the ~900 BTC/day issuance.

This is corroborated by the miners’ net position change metric. We can see that the accumulation has dropped slightly this week, but the ratio of “mined and held” cryptocurrency still accounts for a larger share of “mined and sold” cryptocurrency. It remains to be seen if miners start to sell more cryptocurrency as these changes unfold.

Exchanges and Derivatives

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

Exchanges saw a noticeable increase in net deposits in the weeks leading up to and during the sell-off. The peak inflows spiked to +30k BTC/day on May 17th. Meanwhile, the size of outflows has been steadily increasing, with more at lower prices, suggesting that there are still late buyers even in the market.

An interesting finding is the bifurcation of the exchange market going on in terms of which exchanges are increasing their BTC balances. Most exchanges have actually seen relatively flat or declining balances 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, three exchanges received almost all of the observed net inflows. Binance, Bittrex, and Bitfinex. Balances on these three exchanges have been increasing throughout 2021, though Binance has led 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 United States, this could indicate different market reactions in different jurisdictions. Another explanation is that Binance, in particular, hosts a large number of trading markets, a derivatives catalog, 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 decline from the ATH set in April. Open interest across all futures markets has fallen by over $16.4 billion from its peak (down 60%) and is now back to levels last seen in February 2021.

A similarly large decline has been seen in options markets, with total open interest falling 52% from its peak to $6.4 billion, once again back to levels last seen in February.

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

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