Illustration of the 519 Crash: Did Miners Sell BTC?

This article is from Crypto Valley Live, author: Glassnode

The Bitcoin market has just experienced the largest deleveraging event since the sell-off in March 2020. Market trading fell over 47% from a weekly high of $59,463 to a low of $31,327. This weekly candle is now the largest bearish candle in history, with a total price range of $28,136.

The price action has been completely altered, which can only be described as collective panic, as summarized by @nlw, primarily due to Bitcoin being severely pressured. The sell-off was so severe that it raised the question in many minds of whether the bull market of 2021 is still ongoing. This week, we will review the scale of this adjustment and the reactions of various on-chain entities that can be observed.

A Historic Event

This week, the scale of realized losses on-chain has exceeded all previous sell-off events, including those in March 2020, November 2018, and the sell-off that ended the last bull market from January to February 2018.

The chart below shows the dollar value of realized losses from sold cryptocurrencies, indicating that May 19 saw a new total of $4.53 billion in losses. This is over 300% higher than the previous peaks in March 2020 and February/April 2021, marking the peak of a total realized loss of $14.2 billion for the week.

Even considering the profits from sold coins, this panic event still caused significant realized losses, and the magnitude was substantial. On May 19, the on-chain net loss exceeded $2.56 billion, which is 185% larger than the COVID sell-off in March 2020. The chart below shows that this sell-off occurred after a strong net profit period (green spikes).

This indicates that a large portion of the market was caught off guard by this event.

These net losses on-chain led to a decline in the realized cap, as the prices of coins bought at high prices fell. This week, the realized market cap dropped by $7 billion (-1.8%) from its all-time high of $377 billion.

Looking at the number of unique on-chain entities currently 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 the market that bought cryptocurrencies at high prices, making them potential panic sellers.

Seller Analysis

There are three main groups of entities that could generate selling supply.

1. Loss-making cryptocurrency holders, primarily buyers from the past 3-4 months.

2. Profit-making cryptocurrency holders who may believe the macro top has arrived.

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

Undoubtedly, a significant portion of the recent selling activity has been driven by short-term holders, those who purchased cryptocurrencies within the last six months. The output timing of the sales shows that particularly in the ranges of 1 million to 3 million and 3 million to 6 million in cryptocurrency value, the peaks before and during the sell-off were significantly higher than the typical baseline.

If we compare this to long-term investors, especially those holding coins for 1-3 years (buyers from the last cycle), we see the opposite situation. Those holding coins for 1-3 years actually sold their coins earlier, likely to capture the price performance of ETH at that time.

However, during this panic sell-off, the spending of old coins aged 1-3 years has actually decreased significantly, and their proportion in total activity is also declining. This indicates that veterans are not panic selling and are not in a hurry to exit.

The remaining major question is how large the unrealized losses are, 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 of total underwater value to current market cap.

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

Note that before significant sell-offs, higher-priced cryptocurrencies had essentially "stored value" at higher market caps. After the sell-off, the new market cap is lower, making it possible to realize >100% relative unrealized losses.

Across the market, the unrealized net profit and loss metric has retreated to below 0.5, indicating that the proportion of profitable coins held in the market currently accounts for 50% of Bitcoin's market cap. This level has previously acted as support in the last three bull market cycles, marking the first touch for the market in 2021.

However, if we filter out short-term holders, we can see that a significant panic has occurred. The total unrealized loss of coins held by short-term holders is -33.8% of the market cap. This compares to some of the most extreme declines in Bitcoin's history, including:

• The first bull market top in 2013

• Three events during the bear market of 2014-15

• Four events during the bear market of 2018

• The panic event in March 2020

Regarding miners, there are rumors that due to regulatory pressures on the mining industry in China, selling pressure from miners may increase in the short term.

Are miners selling Bitcoin? Some are panic selling, while others have no choice. Not everyone has access to Western custody sites. The current RMB OTC trading channels also have more uncertainties. At the end of the day, fiat currency is needed to cover operational costs. - Mustafa Yilham (@MustafaYilham) May 23, 2021

Observing the spending of cryptocurrencies by miners indicates that while the flow of miners to exchanges has increased from 100 BTC/day to 300 BTC/day, this still represents a relatively small portion of the daily issuance of about 900 BTC.

The net position change metric for miners confirms this situation. We can see a slight decline in the cumulative amount this week, but the ratio of "mined and held" cryptocurrencies relative to "mined and sold" cryptocurrencies still occupies a large share. Whether miners will start selling more cryptocurrencies as these changes unfold remains to be seen.

Exchanges and Derivatives

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

In the weeks leading up to and during the sell-off, there was a noticeable increase in net deposits on exchanges. On May 17, the peak of net inflows surged to +30,000 BTC/day. At the same time, the scale of outflows has been steadily increasing, with more outflows occurring as prices drop, indicating that there are still late buyers in the market.

An interesting finding is that regarding which exchanges are increasing their BTC balances, a bifurcation in the exchange market is occurring. Over the past few weeks, the balances of most exchanges have actually remained relatively flat or declined. Aside from a slight increase during this week's sell-off, these exchanges have been on a continuous downward trend in balances since March 2020.

However, three exchanges have received nearly all observed net inflows: Binance, Bittrex, and Bitfinex. Throughout 2021, the balances of these three exchanges have been increasing, with Binance leading in the majority of inflows. However, during this sell-off, all three exchanges saw a significant increase in their BTC balances.

Given that these three exchanges serve clients outside the U.S., this may indicate that market reactions differ across jurisdictions. Another explanation is that Binance, in particular, hosts a large number of trading markets and derivatives listings and is the gateway to the Binance Smart Chain, making it a preferred venue for recent retail speculation.

Finally, in the derivatives market, the open interest in Bitcoin futures has seen a massive decline from the ATH set in April. Open interest across all futures markets has dropped by over $16.4 billion (down 60%), returning to the levels seen in February 2021.

The options market has also seen a similar significant decline, with the total amount of unexecuted contracts dropping by 52% to $6.4 billion, again returning to the final levels seen in February.

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