Coin Metrics develops new methodology to measure bitcoin miner activity

Coin Metrics analyst Karim Helmy has devised a new methodology for quantitatively assessing bitcoin miner inventories, separating miner activity from mining pools. This allows a more precise appraisal of the coins at their disposal.

Miners don’t just secure the #bitcoin network, they’re a major force moving the markets.
This week’s @coinmetrics SOTN uses brand new techniques to measure miner activity, and I’m unbelievably excited to share the results. /threadhttps://t.co/FytUZRl1oA

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

Helmy notes that his approach takes into account 380,000 BTC accumulated in the run-up to the third halving in May this year. Previous methodologies, which measured only the balances of addresses that receive block rewards, did not account for these coins.

Previous approaches measured the balances of addresses that received block rewards. We do that, but we go one hop out from there as well in order to study miners, not just pools.
New miners accumulated >380k BTC in the run-up to the halving that the old technique would’ve missed. pic.twitter.com/BxKTBW7VhN

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

The researcher assembled all addresses that received payments directly from coinbase transactions without inputs, and labeled them as 0-hop (mining-pool operator). Addresses of miners receiving payouts from the 0-hop sample were labeled 1-hop.

Helmy notes the relative stability of inflows to 0-hop addresses, since they are comprised largely of the block reward, while outflows are pretty volatile. The network’s halvings are visible in both inflows and outflows. pic.twitter.com/Rn9yFXdTWO

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

The dynamics of inflows and outflows tied to address 1-hop are so volatile that they do not allow a clear pinpointing of halving moments. Helmy adds that, over time, the effect manifests as a gradual dampening of their volatility.

1-hop (miner) flows are wayyyy bigger and more volatile. The halvings aren’t directly visible, but their effects are more subtly apparent in a gradual, long-term dampening in volatility. pic.twitter.com/ch3CBBlWA4

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

According to the analyst, 2020 stood out from the overall trend. Net 0-hop flows remained positive for an extended period for the first time in a while. This was more evident after the third halving.

Along with—well, literally everything else—2020’s been weird because mining pool operators are taking in more than they spend. This is especially true since the halving: 0-hop net flows have remained positive for a sustained period for the first time in a while. pic.twitter.com/lbW5hmv0UU

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

Based on the gradual fading of net flows tied to address 1-hop, Helmy writes of a diminishing influence of bitcoin miners on market conditions.

The key takeaway: while still important, miners are less influential on bitcoin markets than they used to be. This is visible in the gradual dampening of one-hop net flows. pic.twitter.com/aJ5ENkt20o

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

It’s also visible in the decreasing share of the total supply that miners hold, although they still hold a good chunk of the total supply. pic.twitter.com/SFzya84HOv

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

The new methodology is not without its shortcomings, Helmy concedes.

«Labeling miners and pools based on their distance from coinbase transactions is an imperfect method. Especially if applied to the network’s early state, when solo-mining and alternative pool models were more popular», the study says.

The analyst believes that his approach could prove useful for detecting partner and hidden mining pools.

Yes! We’re actively looking into indirectly measuring out-of-band payments. Interpool payments and pool wallet structures are also super interesting for a variety of reasons, including finding secret white-labels and private pools! https://t.co/6BHX611mHm

— Karim Helmy 🦌🏝 (@karimhelpme) November 3, 2020

In October, bitcoin miners received aggregate revenue of $352.7 million, up 8% from September.

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