Original title: Estimating the Price Impact from Large Sellers

Original author: NYDIG

Original source: NYDIG

Compiled by: Mars Finance, MK

The current problems are:

Recently, large holders of Bitcoin have turned into sellers, and while other risk markets have hit new highs, the price of Bitcoin has continued to be under pressure.

An analysis of transaction costs compared to the stock market shows that recent moves in Bitcoin prices appear to be exaggerated.

Monthly data shows that despite continued public attention on miners’ selling movements, in reality, public miners are not selling Bitcoin on a large scale, and private miners may be behaving differently.

The actual impact of large sellers on prices seems to be exaggerated.

Over the past few weeks, large Bitcoin account holders have turned to selling, which has weighed on Bitcoin’s price and sentiment, but to a greater extent than conventional transaction cost analysis (TCA) tools would suggest. Since the first large sellers were consolidated by the Mt Gox recovery trustee on May 28, Bitcoin’s price has fallen by 17.4%. However, TCA analysis of the stock market suggests that even with the potential full release of Bitcoin (which has not occurred), Bitcoin’s price action may be over-interpreted.

The emergence of large sellers

Over the past week, three major Bitcoin holders have had a significant impact on the market: the U.S. government, Germany’s Federal Criminal Police Office (BKA), and Mt Gox’s rehabilitation trustee. According to data from Arkham Intelligence, the U.S. government holds the largest holdings of 213.3K Bitcoins (worth approximately $12 billion), which were mainly derived from the closure of the Silk Road darknet market in 2013 and the 2016 Bitfinex hack. The Mt Gox recovery trustee holds 139K Bitcoins (valued at approximately $7.8 billion) and has been planning to distribute these Bitcoins to long-term creditors since the bankruptcy case (2014). On the other hand, Germany’s Federal Criminal Police Office currently holds 22.8K Bitcoins (worth approximately $1.3 billion) that were seized when the illegal video streaming website Video2K was shut down in January this year.

For traders, especially creditors, the resolution of the Mt Gox bankruptcy has been eagerly awaited. The rehabilitation trustee has set October 31, 2024 as the deadline for the distribution of some Bitcoins. Now, this process has finally made substantial progress, and some Bitcoins have begun to be transferred to creditors. However, the market's initial uneasiness mainly stems from the consolidation of balances held by multiple addresses - this blockchain activity predates the distribution to creditors.

Collaboration between the U.S. and German governments

While the handling of Mt Gox has been high profile, the US government and BKA sales have been less transparent. In both cases, we have not seen clear signs that the sales were ready. The US government occasionally makes its sales plans public, but as recently noted, it does not always follow through on its promises. BKA sales are even more confusing. On-chain analysis reveals that Bitcoin is constantly moving between exchanges and OTC desks in varying amounts. At times, service providers (such as exchanges and OTC desks) even appear to return large amounts of Bitcoin to BKA, with the value of tens of millions of dollars. While this on-chain activity is complex, it is unlikely that BKA is holding Bitcoin. Thankfully, it has sold most of its holdings, and its current holdings are down to 13.1K Bitcoin, which is much lower than the data we used yesterday.

Price impact assessment

Bloomberg’s Transaction Cost Analysis (TCA) feature is a popular tool that allows traders to use statistics such as volume and volatility to assess the likely price impact of their trades. This is particularly critical for executing large or large trades. Although the Bitcoin market does not explicitly provide such data, we can infer the likely performance of Bitcoin trading by analyzing proxy situations in the stock market.

We performed a “secondary offering” analysis assuming the maximum possible sell-off of the entire holdings of the U.S. government, BKA, and the Mt Gox trustee. This totals to 375.1K Bitcoins, or 1.9% of all Bitcoin in existence. We selected several high-flying and highly valued tech companies including Nvidia, Tesla, and GameStop, as well as Bitcoin proxies such as the iShares Bitcoin Trust ETF and MicroStrategy for comparison. In each case, we assumed that a block trade of something like 1.9% of total outstanding shares would need to be sold, and thus calculated the corresponding transaction amount for the purpose of transaction cost analysis.

As can be observed in the table below, the sale of 1.9% of outstanding shares in block trades has a minimum estimated impact on the stock price of 2.8%, while the maximum estimated impact is 11.2%. However, the price of Bitcoin has actually plunged by 17.4%, far exceeding the maximum estimated impact of such a share. We do not believe that the remaining balance of the US government or Mt Gox’s tokens will be sold in an immediate all-at-once sale as described in this analysis. We estimate that the amount of Bitcoin that will be put into circulation in the Mt Gox case may be only 22.3K of the 141.7K Bitcoins in escrow.

Public miners continue to accumulate Bitcoin

A crypto analytics firm has published several reports suggesting that a massive sell-off by miners has exacerbated the price drop of Bitcoin. However, the production and holdings report of public miners in June refutes this claim. The relevant data (due to the lack of June data from Mawson and Dmg, the data of these two companies cannot be included in the entire time series analysis) shows that the sales of public miners rose slightly by 71 BTC month-on-month, but the balance on their balance sheets continued to climb, far exceeding the peak in 2022.

Blockchain analysis provides limited information. Even if one can accurately track the transfer of Bitcoin to an exchange or OTC desk, this only proves that the tokens moved. It is possible that the tokens were used as collateral or loaned, which does not necessarily mean that they were sold. We bring this up because CryptoQuant’s CEO made a splash when he erroneously claimed that Marathon sold 1,000 BTC in June to cover expenses. Although the claim was denied, we have production and holdings data for June that proves that Marathon actually purchased 89 Bitcoins in excess of its production for the month, rather than selling them. This incident teaches us not to blindly trust all blockchain analysis conclusions, especially those with strong assertions.

We understand that public miner activity alone cannot fully explain all miner behavior. There may be differences in the behavior of public and private miners. The on-chain indicators we prefer to focus on are those bitcoins that are just one step away from the coinbase address, which is not an exchange, but the location where block rewards are received. This category of bitcoin did drop significantly in May by 37.4K BTC (about $2.5 billion), but the balance has returned to March levels. Given the limitations of blockchain analysis and its accurate reflection of real-world activity, we would not rely too much on this data.

Fear itself has power

We recognize that heavy selling can have a psychological impact on the market, especially as Bitcoin has been largely range-bound in recent months while other risk assets have surged to new highs. While sentiment and psychology may dominate in the short term, our analysis suggests that the impact of a potential sell-off on prices may have been exaggerated. We do not discount the existence of other factors, but there is good reason to believe that rational investors may find this to be a great opportunity created by irrational fear.