SLP258 Rafael Schultze-Kraft Bitcoin Supply Crunch

Posted in: bitcoin Posted on Posted in: , , , , ,

Rafael Schultze-Kraft CTO of Glassnode rejoins me on the show to talk about Bitcoin on chain metrics and how there is a very bullish set up right now.

We chat: 

  • Overview of how Glassnode’s analysis works
  • Liquid supply vs illiquid supply
  • Number of coins on exchanges dropping and what this means 
  • Difference in structure of bitcoin demand this time vs 2017
  • Why its not true that “2% of accounts control 95% of bitcoin”

Rafael Schultze-Kraft Links:

Previous episode:

Sponsors: 

Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Rafael welcome back to the show.

Rafael Schultze-Kraft:

Thanks for having me back, Stephan. Pleasure to be here.

Stephan Livera:

Yeah. So it’s been a little while since we last spoke on the show and there’s obviously been a lot going on in Bitcoin and of course we are here to talk about what’s going on on-chain. So I guess first, before we get into all of that, can you maybe give us a little bit of an update what’s going on with Glassnode since we last spoke?

Rafael Schultze-Kraft:

Yeah. I mean it’s been, it’s been a wild and an exciting time, right. I think for all of us that have been building throughout the bear market, essentially, we were hoping for this to happen and we wanted to be ready for the, when that bull market starts. And then here we are, and it’s been wild. You know, there is a lot of engagement, a lot of requests, finally people getting much, much more into on-chain data as well. It’s super exciting to actually now see that data in a bull market in real time. Before it was only all the retrospect with respect to what happened in 2017. So yeah. We’re doing very well, very exciting times.

Stephan Livera:

Yeah. And you guys have been sharing a lot of great updates. Now, let me just maybe take a step back just for any listeners who are new, just to kind of explain a little bit about what’s going on here. Are you able to maybe just give a little bit of an overview? How does all this Glassnode on-chain analytics stuff work, if you could just explain a little bit around kind of the basics of how you’re able to see what’s going on on-chain, just for that listener who is new, they’re trying to learn about Bitcoin.

Rafael Schultze-Kraft:

Yes. Of course. So on-chain data obviously refers to the data that is recorded on the blockchain, the transactional data, right? So when people interact with the Bitcoin network, what they essentially do is, sign transactions, send them in the network, miners pick those up and that data is saved on the blockchain. And so this transactional data really has a lot of information, right? And that’s something that is unprecedented because things like that don’t exist in traditional markets. And so this gives this whole kind of economy completely different and new way to actually look at it, look at the data, grok the market, understand things like network health, network activity at adoption, investor behavior, what are the HODLers doing? What are the miners doing? How many funds are being moved around in what size? How much is on exchanges and all of that right. Gives you just this huge amounts of possibilities to really dig into this raw data extract it and then yeah. Really create that or, yeah, get that information out of it in order to understand what’s going on in order to make better form investment decisions as well.

Stephan Livera:

And so then perhaps the next level of detail in is something like understanding how because when somebody is new to Bitcoin, they might think, Oh, it’s totally private, or it’s all totally public. And the truth is it’s somewhere in the middle, depending on what kind of behavior you use. And if you act for example, if you use Samourai wallet and JoinMarket, and so on, you’ll behavior is a little bit more masked obviously, but for most users, that behavior is visible on-chain and there are certain heuristics, right? Most famously or commonly, it’s the common input ownership heuristic. So for users, for listeners out there, when you spend your Bitcoin, it’s like, think of it, like you’re casting down a bar of gold and recasting it into a new size of gold. And then based on the way those move around, people can try to essentially cluster different balances and then try to track different users on the chain. Would you say that’s a fair summary of, in some sense of what you’re doing?

Rafael Schultze-Kraft:

Yeah. Roughly, so the basic unit on the blockchain is an unspent transaction output. Right. and that holds some amount of Bitcoin. And so if you own Bitcoin, what that means is that you have a private key that is associated with the address that is related to that Bitcoin, right? And it gives you the right to actually spend it right. And so when you do that UTXO essentially gets destroyed, it gets spent, right. And then a new one gets created and a transaction can, and sale can contain many of these, of these inputs of these UTXOs that get spent together. And essentially when they get spent, they essentially get destroyed. New ones get created as the outputs of that transaction. And so one of those heuristics that you mentioned is exactly that, right.

Rafael Schultze-Kraft:

If they get spent together, then you assume that they are controlled by the same entity, obviously this is not always always the case. There is a lot of nuances to that, but in general, this is this is one of those that is being used quite a lot. And so, yeah, Bitcoin in that sense is it’s not anonymous right. It’s pseudonymous because yeah. You can essentially see, and the behavior of addresses on on-chain and try to statistical pattern recognition, through machine learning, through clustering and in many advanced methods try to grok which of those actually belong together, which are probabilistically controlled by the same entity. And these are some of the things that we do, but we don’t go down to the individual level, right. Because we’re not interested in single transactions. I’m not interested knowing what a particular person is sending to exchanges or so on. What we re interested as really the macro view, what our funds how our funds from a macro perspective, moving in the network and what does that mean for the network and for the market.

Stephan Livera:

Right. Yeah. And we might get into how you sort of cluster specific individuals or not individuals, but rather types of entities like whales and dolphins and so on. But I think it’s also interesting just to, as you mentioned, look at the macro level of this. So as we speak today, so today is Wednesday, the 10th of March, 2021. And the price of Bitcoin is around 54,000 USD. And so currently about 18.65 million of the 21 million Bitcoins have been issued or mined into existence, if you will. And so I know some of your statistics look at things like liquid versus illiquid Bitcoin supply, and then there’s also, you also consider that some of those Bitcoins have potentially been lost. Are you able to shed some light on those kind of numbers and how you’re analyzing that?

Rafael Schultze-Kraft:

Yeah, absolutely. I think that network liquidity is super interesting to look at. So what we do is you can essentially the supply is held by addresses and it’s controlled by certain entities. And so you can, statistically, you can assess what the probability is of the funds that a certain address is receiving. What is the probability that those are being spent by that entity and through, by quantifying that, you essentially categorize an entity as being, illiquid or liquid, and these terms might be a bit confusing. What is really meant here is that entity a strong HODLer? So is the probability that individual or that network participant is going to spend the Bitcoins that they receive, are they going to spend them or not?

Rafael Schultze-Kraft:

So depending on that probability, you classify them as illiquid and then non liquid. And what we’ve seen essentially that out of those what’s 18.6 million that are already mined today, almost 80% lie with those illiquid entities, right? With strong HODLers, are really in strong hands. So those are Bitcoin that not in circulation, or not to the extent that they’re constantly circulating and therefore are available, to be bought by someone else. And that is, I mean, that is of course a very, very crucial trend, because it essentially leads to this supply squeeze and to this liquidity crisis that we’re seeing, which of course paints of very, very bullish picture for the price of Bitcoin. And this is a trend that we have been observing now for a couple of months, which that is continuing, and we’re not seeing an end to this. So what this essentially means is that once, the supply that is in constant circulation is around 4 million, right. That is substantially lower than the total amount of mined Bitcoin to date.

Stephan Livera:

Right. And so just to replay that for listeners then essentially of the 18.6 million or so something like 14 and a half million of those, are actually illiquid. And then really, that’s only that last kind of 4.2 or so, that is actually being liquid and actually being traded around on exchanges. And I think that’s a really interesting phenomenon because I think if you talk to economists and things, they’ll say, Hey, the price of things is set at the margin. And so even though it’s not like all 18 million Bitcoins are available for supply, or are available for sale today, there’s only a small fraction of those that are actually traded and most and especially in Bitcoin, because we have this culture around HODLing and holding your coins.

Rafael Schultze-Kraft:

Yeah, no, exactly. And I think on those 14.5 million you can, you could potentially subtract 3 to 4 million that are, that are potentially lost forever, right. That will never come back into circulation and the others are then with those strong HODLers. So you’re really see this this phenomenon of that, the one that you mentioned of strong hands of HODLing behavior, something that is not just a meme, but that we see in reality, on the network happening.

Stephan Livera:

Yeah. And I think then also because the blockchain has historical data, this is also another really cool point where I’ve seen you do some analysis on things like the dynamics over time. And I think you’ve mentioned that it’s like the older HODLers, they tend to sell a little bit as the price runs up. And I guess maybe just thinking through, from a fundamental point of view, for some of them, it makes sense. Maybe they want to maybe they’ve been waiting for this long and they think, okay, it’s finally, it’s time to buy a new house or new car or something like that, but then really they’re holding most of their coins. Is that a similar kind of dynamic to what you’re seeing?

Rafael Schultze-Kraft:

Yeah, no, absolutely. I think, and I think it makes total sense, right? I mean, we’re still in a fiat dominated world. And people need to pay bills and people want to want to live a good life. And so what you see is this really reoccurring pattern of old coins coming back into circulation, once those bull markets really, really, really start going up and yeah, essentially that’s what I think is the smart money, right? They are taking profits they’re taking some of the Bitcoins to sell. And what we see then in bear markets, is the opposite happening, right. There’s accumulation phases afterwards where potentially those same participants might be actually scooping up more cheaper Bitcoins when it’s more cost-effective to buy them, to buy them back in.

Rafael Schultze-Kraft:

And yeah, I think that’s something that we saw right now as well within the within the last couple of weeks and months. What is interesting, what I actually looked at just today, I need to take a closer look – is that if you look at the coins that haven’t been moved in more than a year and more than two years, that percentage of those coins is coming down. Right. So which means that those coins are actually coming some of that supply is coming back into circulation, but if you look at the coins that haven’t been moved in more than three years, that is still going up. Right. and those are essentially known, the players that have been there before in 2017 that actually went through the last bull market. And that for me is very curious to see, right, because that might actually show that those investors that have been there before 2017 and have gone actually through that bull market have learned from it and, have now stronger hands and are waiting for even more upside or even HODLing for good.

Stephan Livera:

Yeah interesting. And I suppose this is always going to be somewhat of an inexact science and it’s about heuristics and trying to get it right on average, as opposed to get it right every time, because I can think of examples where, as an example, let’s say somebody is an older, HODLer and they are moving their coins, but what if they’re moving their coins into a more secure setup? So, as an example, maybe they’ve been sitting on a single signature for awhile, but now the value has gone up significantly. Obviously we’re sitting around $54,000 USD. I mean, it was what, a year ago that we were like 5,000 USD or something. So they might be thinking, well, I need to get my clients into multisig, and I need to be more secure with my coins. So I guess that’s one area where maybe that cuts against that heuristic a little bit, but maybe on your side, you might be looking at all, okay, look at all these coins, they’re going into an exchange. So obviously they must be being sold.

Rafael Schultze-Kraft:

Absolutely. I think this is all statistics, right? This is all sort of the overall trends. And there is definitely examples for which these metrics don’t hold in exactly those examples that you mentioned. Right. I can totally see someone having bought Bitcoin a year ago or so at 5k and now maybe left it on the exchange or so now at 50K or 50 plus K they’re thinking to themselves, okay, this is too much, this is too valuable. This is too risky to actually keep leaving it on an exchange or pulling it off to hardware wallet that they bought or something like this.

Rafael Schultze-Kraft:

So that coin that potentially has more than a year since the last move is now coming back into circulation, but it’s nothing that where someone is realizing profits, but really just bull markets draw attention to something that you might have forgotten about or something that you might not have been paying too much attention to, right. People maybe just want to assure themselves of the accessibility of their coins when the price goes up. There’s so many things here. I think that play a role that do not have always do not have to do with someone selling their bitcoins. Yeah.

Stephan Livera:

There’s a lot of interesting aspects around that. And I think it’s also worthwhile pointing out here that the coins exist, right? So 18.6 million coins exist. And really what we’re talking about is the distribution of those coins is changing because no matter how many new people will come into Bitcoin, they’ll never be more than 21 million. Right. But it’s like, how do you, I guess, what we’re trying to do here is try to look at what’s going onthe chain and understand, okay, there’s all these new people coming in. And what does that actually look like from an on-chain perspective, right. Because it’s not like there’s new coins. I mean, other than obviously the block subsidy, there’s not new coins being made. It’s about what’s the distribution.

Rafael Schultze-Kraft:

Yes, absolutely. So I think I mean, yeah, the new coins is the issuance, which currently is what 900 a day or so. Roughly, that of course is being added on a daily basis. But the bulk; what the 88% or so have already been mined. So it’s all there. Right. So it’s really looking at that UTXO set of that Bitcoin supply that lives on the blockchain, and then trying to assess what is happening with that, right? How is it being redistributed? What is happening to old coins? What are the exchanges, all these kinds of things that you can actually grok from looking at that transactional data, which is, as you say, whatever has already been issued.

Stephan Livera:

Yeah. And I’m also curious as well, the impact of, okay, so there’s address reuse. And I think in the earlier days, that was more of a common phenomenon where people might just have in their forum signature or online, they might say, Hey, you can donate to me at this address. Or you can give me Bitcoins at this address. And then over the years, more and more people are using what’s called HD hierarchical deterministic wallets, where they actually generate a new address to receive into. And so has that changed the analysis for you, or are you still mostly relying on common input ownership heuristic there?

Rafael Schultze-Kraft:

So the common input heuristic is for when you spend them, right. When you receive them, there’s different, there’s different things to this. So first we have this metric that we call accumulation addresses that is actually all the addresses that have never spent funds, but have received at least two transactions. Right. And we use two, because if you use one, then there’s there’s a lot of these relay transactions on-chain, right? Sometimes when someone is sending a Bitcoin from A to C, then it goes through an intermediary address for whatever reasons that is very short-lived. And then, it actually is just a one time use disposable address. And that’s why we look at those that have received at least two transactions. And we see that the quantity of these addresses is still growing, right.

Rafael Schultze-Kraft:

There is I think, half a million of those that holds almost 3 million Bitcoin. So it’s substantial. It’s quite a lot, but of course you’re right there’s these, these dynamics that we’ve seen as well, where wallets are more sophisticated with respect to which I think is needed and is important with respect to security and with respect to privacy. And that holds for things like change addresses, right. If I send Bitcoin and I need to spend a certain amount of UTXOs and I receive change from that transaction nowadays, think it’s very, very uncommon that change goes into the sending address back into the sending address, even though it still exists to a large extent, like you wouldn’t believe it’s still there. Right. But more and more wallets actually make use of creating a new one in which those Bitcoin flow back in. And there are other heuristics where you can with a certain probability detect those, right. It’s simple statistical pattern recognition so the methodologies, they need to become a bit more sophisticated in order to maintain the same level of accuracy with respect to these metrics.

Stephan Livera:

Yeah. It’s really fascinating stuff. And I suppose one angle that does kind of come to my mind and maybe this is the influence of my friend Matt Odell, and the privacy angle. I’m curious, does that play on your mind that some of these heuristics they kind of cut against people’s privacy and that some of these clustering algorithms, to some extent now, I understand you’re not doing it to the same level that say a chain surveillance company might be doing it, but does that play on your mind in terms of cutting against some of the privacy heuristics of just every day Bitcoin users out there?

Rafael Schultze-Kraft:

It does. It does. Absolutely. You know, and that’s something that we’ve been thinking about a lot as well. Right. I think, and this is why I always try to emphasize it and why I try to mention it, that we are interested in macro flows and not in individuals we’re interested in those driving forces of the markets that is the big institutions. And so, that’s absolutely an angle where we try to be as careful as possible and to not go down the forensics road, right. Not go down the this particular transaction belongs to X or Y or comes from a dark market or whatever that is. So I think this is for us, it’s that’s something that’s very important to emphasize because we’re really interested in the macro view of what is happening on-chain related to the markets. Mostly.

Stephan Livera:

I see. So if I could press on that thread just once more, it could be that, I mean, in order to find that macro view, you kind of have to cluster somebody’s wallet, don’t you, I mean, in order to know, Oh see, that’s the dark net market, or this is the Hydra market Bitcoins, or this is some these individuals are using coin join as an example. And then you might have to sort of, to some extent, apply clustering or apply some analysis to that. Right?

Rafael Schultze-Kraft:

Yeah, so, so the only entities that we look at are miners, exchanges, and OTC desks maybe custodials, right. So I don’t, I don’t even, I don’t even know about the dark markets. So I am just mentioning them because I know that there’s companies that do these forensic analyses and they might even say this Bitcoin is tainted, or like whatever it is. And so these, these, these heuristics that we apply, we just apply them automatically in the backgrounds through the clustering algorithms, without us knowing like whose addresses those actually belong to, or where those reside or whatever that is, the only, the only ones that we actually have labels for are, I mean, obviously the miners to get them, because those can come from the coinbase transactions, and the exchanges, because those are those are the interesting ones when you’re looking at market behavior.

Stephan Livera:

Sure. And I think, yeah, I think that’s fair. And as you mentioned, you’re not going to that same level of a chain surveillance company. And I think the answer as well, to be fair to you and other people doing this kind of work, is that really, for people who are more concerned, the answer is not to kind of shout at the people doing the analytics, but it’s to actually be more private on-chain. And that means learning to use coinjoin, learning to use these techniques for your own privacy. If that’s what if you, as a listener, that’s what you’re interested in, make sure you’re doing some research into those privacy techniques. And you’re using non KYC methods of acquiring your Bitcoins. But certainly I think the overall analysis is quite valuable and very interesting for those of us who are interested in the macro perspective of what’s going on on-chain and how many people are HODLing. And so on, I’ve seen you chat about some of these different metrics. There’s one called NUPL, net unrealized profit and loss. So, Rafael, what is that?

Rafael Schultze-Kraft:

So the NUPL is a metric that essentially tells you the percentage of the market cap that is in profit or loss, right? This is a metric that relies on a concept that is the realized cap. And the realized cap is essentially valuing each Bitcoin at the time that those Bitcoin last moved. Right? So as compared to the market cap where you say, these are all Bitcoins, this is the supply. You know, each of those is multiplied by the market by the current price for realized cap, you do it by the price at which the Bitcoins last moved. And so taking these two concepts, you can actually quantify how much of the market cap, what is the percentage that is in profit or loss.

Rafael Schultze-Kraft:

NUPL essentially gives you exactly that metric, right. So what happens is that the metric then goes up in bull markets when essentially investors are realizing their profits at a lower, at a slower rate than then the market cap is going up, right. And so currently we’re, I think at 70%, as far as I remember the last number which actually essentially means that 700 billion of the market cap are with respect to the sunshine analysis and in a state of profit. And this can you can map this then to essentially these different investor sentiment bands within cycles. And as you go above 75, 80, this is when sort of like the market gets very, very greedy because no one’s realizing prizes. Everyone’s like really hoping for more and more and more. And this is where historically it has been a very good indicator for those tops.

Stephan Livera:

Yeah, I see. So it’s sort of like a, it’s like a local top indicator kind of, I mean, obviously these are all heuristics. None of it is like a hundred percent, but historically it seems to be that way. Correct. Yeah.

Rafael Schultze-Kraft:

I use it more for global tops. I think it has been a very good global top predictor these, the biggest Bitcoin cycles that we’ve seen and the bottoms as well. So it’s a very, very nice metric that helps navigate these cycles and actually give you a good feeling of where we currently are. Right. Whether it’s a good entry point, whether we are entering or leaving a bull market, whether it’s becoming dangerous and we might be hitting one of those tops anytime soon. Yeah.

Stephan Livera:

So as you view NUPL, then where, as you said, it’s about 0.7. So I guess what were just to give listeners some context, what was like a good accumulation point, and what’s kind of like a, we’re nearing the top point?

Rafael Schultze-Kraft:

So the accumulation points is essentially when most holdings are underwater, right? So that essentially goes below zero and then below zero essentially means if you have minus 20%, it means that 20% of the of the market cap is underwater. And so these are globally, always very, very good entry points historically. And when it goes above, when we enter essentially 75 is when are you know, in that euphoria green zone. So this is where you kind of start might want to start thinking about that a top is someone year, so we’re currently at 70, but there’s still a lot of upside. If you think about, if you look at 2017, for instance, I think we entered that 75 range in early December 2017. So we still had three weeks to go in those three weeks. I think Bitcoin did another, I don’t know, 50, 60% or so. Right. And so we still we’re still way below that. Right. Even, even if we start entering into 75, we might still have again if it looks similar this time, those 50, 60% and depending on the price at that point in time, I think there is, there’s still, some way to go.

Stephan Livera:

Yeah. So it’s like, I guess the other question is, can it sort of stay in that range for some time? Like, and then just over time as new people are coming in, it just kind of stays around that 0.7 range or does it kind of have to move?

Rafael Schultze-Kraft:

No, no, I think it can. I think it absolutely can, right. The question is how long, right. I think at some point it really gets overextended. Right. And then as the price goes up and up and up people will start — eventually realizing the profits. And then that of course can cascade and then it comes back down, but we can stay within that range. I don’t know how it was for the previous markets, but as I mentioned, I mean, we were almost a whole month in that range. And usually that’s towards the ends of those cycles where prices really accelerate again quite a bit. But we were close to it. We’re close to entering that 75% and now we’re back at 70. So until we get back to 75 and then depending on how long we stay there, I think it’s something that I am looking at, but nothing that I’m worried about yet at all.

Stephan Livera:

I see. And of course, as people who were around the last few times, they know that there were 30% drawdowns on the way up, so it could well be this we’re just going through a few of those on the way up. Right?

Rafael Schultze-Kraft:

It could very well be. Absolutely. And I think that’s just something to keep a close eye on, right. There are these drawdowns, you can go back 30%. Right. And that’s why I think that it’s never good to just look at a single metric, but you start really getting the whole picture by looking at many of them right, because each of them gives you a different perspective. Each of them gives you a different quantification on where we are, what investors are doing and whether we’re really close to something that might indicate a top or not.

Stephan Livera:

I see. Yeah. And I’ve also seen, you were chatting about this metric called UTXO Realized Price Distribution. So I guess they’re a little bit related. Can you outline what is UTXO Realized Price Distribution?

Rafael Schultze-Kraft:

Yeah. They’re, very much related. It’s there it’s very much related to realized price actually. Right. So the realized price is just the average buying price so to speak from a non-chain perspective, because it just gives you the average price at which Bitcoin’s moved on-chain and what the UTXO price distribution does is simply break that up into histogram where you have these buckets, and then you see how many Bitcoins moved at 20K 21K 22K and so on and so forth. And this actually gives you a really nice overview of that landscape on where there is a lot of activity, a lot of volume and therefore also potentially a lot of capital inflows. So these usually can form these thresholds of essentially support for the price, because there is a substantial amount of people that have assigned Bitcoin, that particular price at that, at that moment. Right. and so that’s what we recently saw, right? A lot of activity between I think roughly 45 to 48 K, which has held very strong now within the last couple of weeks and people seem to see that as a strong support there.

Stephan Livera:

In other words, it’s pairing into the psychology of those investors who feel like I’m not going to sell, unless I’m getting a profit. And that’s why if they bought in at 45 or 48, they don’t want to sell it for 44, for example. So they are more of inclined to hold so long as they have a sufficiently strong hand, right.

Rafael Schultze-Kraft:

Yeah, or for whatever reasons they they decided to buy it 45, 46. Right. So, and a lot of people did, right. That’s why there’s a lot of on-chain volume. And those are not the ones that are going to sell once the price gets back to those levels, right? Those are the ones that are expecting more upside. And so this is where this capital is sort of like concentrated on these regions in the price that we see on-chain, that then become potentially the support levels.

Stephan Livera:

In terms of clustering and seeing what entities are doing on-chain. What about miners? What are you able to analyze in terms of mining activity on-chain?

Rafael Schultze-Kraft:

Yeah, so miners of course are crucial players in the space as well. And one thing that I like to debunk always is this miners are selling out, right? This is something that comes up a lot as well, which it’s not something that we actually see. There is again these periods in time where miners the funds that they hold, they flow out in larger quantities. And we’ve seen something like this now in November, December up to January, maybe which has flattened out again. So they’re back at neutral they’re not moving a lot or not moving the coins out of their wallets. And potentially it took some profits there. But it’s notthing that is significant, right? It’s not this miner sellout narrative. It’s probably more on the side of their economics and Bitcoins that they have to sell for their mining operations. But that short term sell that, as I say, was not very significant has depleted now again and we’re back to the neutral level. That’s what the current status is with miners on-chain.

Stephan Livera:

Yeah. So I think the narrative has been that Oh, see, miners have all of these operating costs, so they need to be spending down the coins to be able to fund that. But I think now we’re starting to see some miners come out and say, well, actually we’re able to get debt financing and use that to fund our operating costs and therefore keep on HODLing, or at least HODL more coins or HODL for longer than we otherwise would have had to, because we were able to get fiat financing.

Rafael Schultze-Kraft:

Yeah, absolutely. I think that’s part of that, right. HODLers are incentivized to HODL as well. And they will, and now they have the possibility to do so to a larger extent by just using Bitcoin lending services or so and I think it makes a lot of sense for them. Right? I think that is part of the narrative. That’s nothing that we can see from on-chain data, but from conversations that we’re having. I think that’s one of the paths that they’re taking at this point.

Stephan Livera:

Another interesting phenomenon is obviously the collateralized loans space is growing rapidly now disclosure for my listeners, Unchained Capital and HodlHodl are sponsors of mine who offer this as a service, but I think it is an interesting phenomenon here. And I wonder now, maybe this is a little bit, not as much on-chain analysis, but it’s a little bit more just kind of fundamental analysis, or just looking at what’s going on in the market. I wonder whether that also contributes a lot more to the HODLing and the restriction of the available supply, because there may be whether that’s an older HODLer who wants to get USD for living expenses, or it’s a miner who wants to be able to hold longer, what kind of dynamic do you think that brings to the Bitcoin world over these coming years?

Rafael Schultze-Kraft:

You know, I think that’s something that I never looked into it until, until actually only recently. And that I find very fascinating what is happening in that space and how much traction that has actually gotten, like how much has happened on that. Right. That’s really one of those manifestations that I’m seeing where this new economy is being built on top of Bitcoin, right? Because now you have these debt, lending, borrowing services on top of this new economy. So I find this very interesting. And the reason that I do, especially is one with respect to miners or everyone wanting access to fiat without wanting to sell their Bitcoins. I think that’s that’s a very clear narrative there.

Rafael Schultze-Kraft:

And the second one is especially when it comes to the markets as well, is that I mean those are over collateralized loans for which you get six plus percent. And that is something that you won’t find in traditional markets. So what I’m thinking, right. And what I believe is that I cannot imagine anyone in wall street or in traditional finance anywhere to just look at that and ignore it. And I think that this could be driving a lot of new capital inflows. If people can actually rely on 6%, 7%, 8% yield a year. That’s an APY that’s not easy to find somewhere else. And that I find very, very fascinating. I’m curious, very curious to see how that plays out now in the upcoming months. Yeah.

Stephan Livera:

Right. And I say it like, so in, for example, in the case of someone like HodlHodl, they are actually finding APY is even higher than that, but we should consider though that they are doing stable coin lending. So the interest paid on that kind of example is interest on say USDT whereas in the case of, let’s say you are borrowing against your Bitcoin, you’re paying the interest in that example. But I think to the broader point around helping people HODL for longer using these loans, that’s an important dynamic, but also on the downside, there is a double-edged sword here, because if there’s downwards price movement, then we can see a lot of liquidation. So that’s where also listeners to have to be responsible and prudent because if they enter into a loan where they are not having enough coverage for that then the margin call can come and you can get liquidated. And obviously that’s a risk for people. And then that can also bring the price down quite rapidly as well. So it kind of is a double-edged sword in that way.

Rafael Schultze-Kraft:

Yeah, absolutely. I think and it’s still something that is very nascent. Although many of these lending services were alive before the Black Thursday events last year. And I think at least from what I know, many of them did a good job of getting through through that crisis. So yeah, it’s definitely something I’m very curious about and I’ll be looking at very closely to see how that plays out in the upcoming months. Especially given that the AUMs of the services within, within the last year have really exploded. So I think that there’s quite some activity happening there.

Stephan Livera:

Yeah. Also in terms of looking at behavior on-chain, one other metric I’ve seen Glassnode mentioned in some of the weekly analysis is a supply adjusted coin days destroyed. So this is a way of looking at older coins moving. Correct? What is supply adjusted coin days destroyed?

Rafael Schultze-Kraft:

Yeah, so coin days destroyed is simply looking at the age and the volume of the coins that are moving today on-chain. Right? So if there’s a Bitcoin that moves today that last moved seven days ago, then that’s seven coin days destroyed, right. If I have two Bitcoins there are moving today and the last time those moved was 30 days ago, then that’s 60 coin days destroyed. Right. So it gives you a metric of about the age and the volume of the coins that are moving on-chain today. Supply adjusted here simply means that as time goes by, as there is more supply then the baseline goes up for coin days being destroyed, because there’s simply more coins and there’s simply more days. So it simply trends slightly trends up. And so by just dividing it by the supply, you kind of bring it down to the same baseline historically to make it more stationary. And so, yeah, coin days destroyed is a super valuable metric. Also in order to grok what are long term holders doing right? Are our old coins that have been dormant for many months, for many years, coming back into circulation.

Stephan Livera:

Really fascinating stuff. And I think it kind of that is probably another one that comes into, if you think through fundamentally, what are some of these people doing? Well, it might be an older HODLer who is taking some out, or they need some for living expenses cause they’ve still been HODLing and so on. But very interesting in the way that you can perhaps look at some of these and maybe combine some of the different pieces together to give yourself a bit of a more accurate view or at least some try to validate a thesis that you might be having about what’s going on in the market. So that’s certainly an interesting thing there. I think also the other really big one that a lot of people are talking about now is how the number of coins on exchanges is dropping very quickly. So can you give us your analysis on this? What’s the story there?

Rafael Schultze-Kraft:

Yeah. I think that ties into this liquidity supply crisis that we’re seeing, right? So what we’ve observed is that we’re in, we’re seeing this huge depletion of liquidity on exchanges that has now extended roughly a year, I would say. So it’s very, very long, very, very deep. Exchanges have lost around 20% of their supply. And it’s an interesting phenomenon because it hasn’t happened to this extent quite yet in previous years. And I think that it’s something that fits in very, very well with the institutional narrative, right. Because institutional is coming into the space they’re now buying this huge amounts on spot exchanges, right? So they do custodial services, OTC trades and these kinds of things.

Rafael Schultze-Kraft:

So I think that this has very much to do with that as well. You know, potentially also things like lending services that we’re talking about that that being moved there and then of course also simple education and self custody people having long-term conviction, pulling their coins from exchanges into hardware wallets, or cold storage. So yeah, there’s the supply squeeze. And I think that’s very related to the price action that we’ve seen recently.

Stephan Livera:

Yeah and to give some context on the numbers, maybe you probably have a better grasp on this than I do, but it seems that it’s gone from something like 3 million Bitcoins on the exchanges collectively, and it’s down to maybe two and a half, and it’s still kind of falling a little bit further, like 2.4 million or so.

Rafael Schultze-Kraft:

Yeah, exactly. It’s roughly from the peak, I think it’s roughly yeah, 600 K or so since the peak from exactly from 3 million it’s roughly 20%. And that’s substantial, right? That is very substantial given that, yeah, these exchanges are where actually the markets are happening. So it’s super, super interesting what is happening there.

Stephan Livera:

Right? Because if we consider that the price is set on the margin, then it means the only way this resolves is this, the price goes a lot higher because at anytime some big company or some billionaire, or some hundred millionaire, or just a lot of retail individuals are out there trying to buy Bitcoin and pull it to their own cold storage, then it means on the exchange side or on the OTC broker side, they’re trying to get out there and source some coins, but there’s not that many left to sell.

Rafael Schultze-Kraft:

Yeah, exactly. I mean, even the OTC desk, they need to pull their liquidity from somewhere. Right? I think we’re actually currently deep diving a bit more into this analysis to really get a better grasp of what is going on. You know, there’s some unpublished data where we do look at OTC desks where we have seen where their balances going up in the same periods of time. You know I think a lot of that is actually moving into custodial services for institutionals. And that’s exactly that. It’s this liquidity depletion. It’s not retail that FOMO retail kind of dynamic that we saw in 2017. But but this fits very, very nicely with all the announcements that we’ve heard over the last couple of weeks and months of public companies coming in and scooping up those Bitcoins. And those are only the public ones how many funds and family offices and so on are out there doing similar things.

Stephan Livera:

Yeah, because in 2017 it really seems that it was much more of a retail driven market. And at that time, the whole institutional money, it was more of a meme at that point. And it seems that this time in 2021, it really is a lot more institutions who are coming in. And I guess the typical pattern for them is they might be buying on some OTC desk or one of the big exchanges, and then they might be pulling it out into one of the larger custodians. So we’re talking Fidelity as a custodian, Coinbase custody, BitGo, Anchorage, maybe Knox custody, these other players. So essentially even though the amount on exchanges is dropping, it could still be with a custodian, but just a non exchange custodian.

Rafael Schultze-Kraft:

Yeah, exactly. And I think that’s a large part of the narrative and non exchange custodians,

Stephan Livera:

Right. Because historically I think the space wasn’t as developed, so a lot more people might have left their coins on an exchange.

Rafael Schultze-Kraft:

Exactly. Not at all in 2017. Right. I think that’s what is actually making this whole institutional capital inflow possible the infrastructure now in 2020, in 2021 is there that infrastructure didn’t exist to that extent in 2017, right. I mean, there’s other factors, but that’s like the accessibility for them the infrastructure that they need in order to really go deep into this market that didn’t exist before. And so I think that’s one of the very big differences between these markets that in 2017, it was clearly retail focused and retail driven while now at least that first push of this of this market was institutionals. And we have only recently seen that retail, has actually arrived within the last couple of weeks.

Stephan Livera:

Right. So up until now, it’s been mostly institution led. And if anything, now retail is also coming into the game. So now it’s just going to be retail and institutions all trying to stack over the next few months as we kind of approach as this bull market develops.

Rafael Schultze-Kraft:

Yeah, exactly. I don’t know when we started seeing retail, I think maybe a month ago, six weeks ago or so. Right. And where it started slowly coming in. I think there’s a lot of off-chain data as well, right. With respect to sign ups and sign-ins on exchanges these website visits, but then also on-chain, you kind of see the amount of new entities entering the space and that has just like surged crazy in the last couple of weeks. So those are the smaller players that are coming in. So I’m really curious to see how this plays out and how that changes the markets and the volatility potentially as well. Within the next couple of weeks and months,

Stephan Livera:

I’m curious as well, because just individuals, some of them can be weak hands and some of them can be strong hands with high conviction. I’m wondering whether you’ve seen anything on-chain to indicate that in, from an institution point of view, whether the ones coming in now are weak hands or strong hands, or do you think it’s more like we won’t know until they get tested? So let’s say, I don’t know, just for example, let’s say it goes to like 250,000 and then it crashes to 50,000 or a hundred thousand are we only going to know at that point, how many of them are strong hands?

Rafael Schultze-Kraft:

Yeah, I think so. I think it’s a bit early especially from an on-chain perspective because I don’t think that institutionals, with all the overheads that they need in order to come into the space to actually know, invest. I mean, those are processes and preparations that as far as I know, I don’t have deep insights, but they take they take a couple of months, right. In order to be able to execute to the amount that they want. And so I believe that it’s a bit early yet to actually get a feel for their conviction and whether they’re here for the long haul or whether there’s among them, actively managed funds that are essentially trying to just maximize the profits and get out as soon as possible again I don’t believe that’s the case, especially if you look at the names of of companies that have announced their investments. That, to me sounds more like we’re here to stay for at least for a good while.

Stephan Livera:

Yeah. And it’s fascinating because I think the narrative has really shifted in the last year or so where there’s really much more of a long-term store of value conversation. And so potentially that would lead people to be stronger hands even coming into it, rather than kind of historically where people had to go through a cycle to become a strong hand. But then on the counter side, you might see the more professional level investors and institutions who are trying to rebalance on the way up, where typically a lot of individuals don’t bother rebalancing on the way up.

Rafael Schultze-Kraft:

Yeah. And probably make use of the volatility as well that you don’t get anywhere else. So yeah, I think we would still have, have to wait and see what, what this does. It’s something that I’m very curious about because it’s Bitcoin up to now has moved very mechanically, right. Has moved in a very predictable, I mean, it’s insane if you look at market cycles, right. How beautifully they just come and go and now you have this new stream of investors that have potentially different conviction potentially like different ways of behaving in this market or like what this potentially does structurally to the space. I’m super curious to see how this plays out and if, whether all those, quote, unquote predictions and models that people have play out, or whether they kind of get disrupted by this, new mature money that has flown in. Yeah. I’m really, really curious to see that.

Stephan Livera:

Also the other interesting topic I wanted to discuss with you, and I know you’ve done some analytics and data science work on this too, is concentration of ownership. Now there’s this kind of often quoted sort of mainstream media argument of Oh, 2% of accounts, which first of all, that’s wrong. 2% of accounts control 95% of all Bitcoin, is that true? Or is that wrong?

Rafael Schultze-Kraft:

Yeah, no, that’s that’s obviously wrong. And I think some of the analysis that we did was essentially to debunk that, right. And that number, these 2% of accounts control, 95% of all Bitcoin is something that has been popping up all the time. I mean the sentence itself is wrong because, what do you mean accounts? There’s no accounts. So right. It’s first of all, if you’re talking about addresses, then that’s a different story. The whole thing about this is that if you look at the blockchain and you easily do this computation, right, and you take all the addresses that exist, and, you look at all the Bitcoins that all of these addresses hold, then you arrive to exactly those numbers, right. In that sense they could be correct, right.

Rafael Schultze-Kraft:

2% of the addresses are holding 95% of Bitcoin, but of course via, if you’re doing these analysis, you need to be much more nuanced because this just leads to these very, very wrong narratives that are then being picked up at media. And this is what stays in people’s heads. And so what we did is we tried to get down to something that comes closer to the truth than this. Right. And I think one of the important things is that not each address on the blockchain is to be treated equally when you do these kinds of analysis. Right. Because we all know a, if you have an exchange address that holds the funds of millions, of hundreds, of thousands or millions of users, then that’s very, very different from my hardware wallet address. Right. And so, or look at miners, this is the same thing and so on and so forth.

Rafael Schultze-Kraft:

Right. So there’s these distinctions that you need to do on the one hand. All right. And then also when we get back to now to clustering and the heuristics and so on of course I can have multiple addresses that are all controlled by me. Right. So these should not, if there’s possibilities to assess whether they are controlled by the same participant we can make use of that information as well. And so that’s essentially what we did. Right. and of course our methods are not perfect. We’re talking again here about statistics and heuristics and clustering, and then, address labels and it’s not a hundred percent correct, but you immediately see that you’re shifting that number that shows that high concentration way, way, way further down.

Rafael Schultze-Kraft:

Right so 2% do not control 95. Our upper bounds is essentially at 2% might control 70% or so. And that’s what I mentioned that is an upper bound. So we are very, very conservative there with the methodology that we apply. Right. If we’re not sure that something is actually should be clustered, that we’re not doing it. And we believe that number is way less especially if you take into account numbers that you cannot get from on-chain data, which is the amount of users on an exchange, right. The exchange on on-chain is essentially, well, a black box, right. It’s just a set of addresses that hold funds. And then they have their own accounting on top of it. But that’s something that we cannot see. And so, yeah, this whole analysis was in order to debunk this statement that it was popping up all over the place.

Stephan Livera:

Yeah. I see. And in your analysis, you actually categorize, or I guess, stratify the different holding levels. So you say as an example, shrimp, with less than one Bitcoin crab with 1 to 10, going up to fish with 50 to 100, and then sharks with 500 to 1000 whales with 1000 plus coins and then humpbacks 5k, and over the Michael Saylors of the world. And then you’ve got like exchanges as well. So that’s a really interesting analysis. And I think, I guess it gives some rough level of what size holders there are on-chain that is obviously not talking about people who leave their coins on an exchange or with, I guess, some large custodian.

Rafael Schultze-Kraft:

Yeah, absolutely. Yeah. I think that categorization comes was initially in some very early forums as well. And then I got into a conversation with Willy Woo actually we talked about this and this is and then when we then decided let’s do this analysis and let’s categorize all these different players, these participant sizes into these different, different, yeah maritime fauna and put it out there. So just as an educational piece to show that, it’s not as bad as people try to paint this, so, yeah.

Stephan Livera:

Yeah. And also, interestingly, I thought it was fascinating that you were saying the amount of Bitcoin supply held by the smaller groups, the shrimp and crab has actually increased, and that some large entities, so dolphins, sharks, whales, and humpbacks. So we’re talking what is that like? Which ones dolphins again, sorry dolphins are 100 plus. So basically the amount being held by those dolphins through to the whales has actually decreased a little bit. And also you mentioned that there’ve been new whales birthed in a sense, could you explain what that means?

Rafael Schultze-Kraft:

So essentially, there’s two different insights here, roughly. So over time, over the years, what we see from this data is that Bitcoin gets more dispersed right. From larger entities into the smaller ones. Right? Which is a beautiful thing to see, because that sort of like ties into this ethos of de-centralization. Like against ‘Bitcoin is highly concentrated now’, it’s actually spreading over time, that’s one of the trends that we saw in the data, but then interestingly, on a more short term, and that is throughout 2020 and 2021, what we saw is that the amount of whales has risen a lot, right. Again can, you can make the connection to institutionals the connection to the depletion of liquidity on exchanges and so on and so forth.

Rafael Schultze-Kraft:

Right. So very, very nice to put all those data points then together to actually see, Oh yeah, these are these are related to these big players that have been entering the space. And so we’ve seen this rise in whales. And yeah, we framed it as whale birthing, because it’s the amount of entities that holds more than 1000 Bitcoin. And that has, I mean, I think in December and January, it just surged a lot. It has come down a bit now over the last couple of two or three weeks, but we really saw that huge increase throughout the last couple of months on-chain.

Stephan Livera:

Yeah. This is all very fascinating stuff. So I guess maybe if you were to have your outlook over let’s say for the rest of this year, what are some of the indicators, what are some of the things that you are looking out for?

Rafael Schultze-Kraft:

So I think there, there’s in general, there’s a couple of themes there that I am looking at, so one, one thing that I never take my eyes off is network activity, network health, network security, right? These really these fundamentals. I want to know what is happening there and what is the hashrate doing? What is the amount of activity in the network? Is it healthy? What is the adoption, how many people new users are coming in? That’s something that I look at very, very closely then I think this whole liquidity narrative is something that I’m keeping my eyes on very, very closely, and to see actually how that plays out, how that structurally maybe changes over the next weeks or months, or whether that trend actually continues.

Rafael Schultze-Kraft:

I’m looking at whales as well. So these larger players whether there’s more of them coming in whether we can grok if they’re, if they’re transacting then really make the connection again, there to off-chain data, to something like what are the grayscale holdings? What is the Bitcoin ETF doing? Right. So everything that goes into the direction of institutionals and the data points that are available for those right now, I have a very close eye on retail. I really want to see how this plays out, If this keeps up trending, if we can actually see a lot of FOMO and FUD within this bull run potentially a bit more volatility whether we really see increased activity of transactions into and out of exchanges, that’s definitely something that I look at.

Rafael Schultze-Kraft:

And then I think, these market indicators, right? These, this market cycle indicators, like we talked about NUP. There is, things like, SOPR, reserve risk, a lot of these fundamental cycle indicators that give you a good sense of which of those indicate that you might be getting into the dangerous zone of reaching a top. And then I think what will be really interesting to see is whether this is potentially a double top cycle where we get up to whatever 80, 90, 100, have, have a big correction and then, and then start ramping up again. That’s something that I’m looking at as well. And something we didn’t talk about, which is off-chain is that the derivative space, right?

Rafael Schultze-Kraft:

I think futures, and then the open interest, there is something that I really like to look at a lot with respect to and then also combine it with on-chain, because yeah, derivatives are something that have gained a lot of traction. In fact there have been now times where they showed more volume than the spot exchanges. And and so and at the same time, it also means that if you have, if you have these futures contracts, that there is margin locked up in these contracts that then again ties into the whole kind of supply and liquidity narrative. So yeah, I would say roughly those are the big, big things that that I’m looking at, and probably, I forgot many. It’s just, there’s so many and so much that is interesting there.

Stephan Livera:

Yeah. Well, it’s been really fascinating. Yeah, just there’s a lot of insights to be gleaned from this as well. So Rafael, before we let you go, where can listeners follow you and where can they find Glassnode online?

Rafael Schultze-Kraft:

Yeah. So Twitter, it’s @glassnode (www.glassnode.com) for the company. I’m @n3ocortex on Twitter. First E is a three. And otherwise on studio.glassnode.com. This is our suite where we have all the metrics that we talked about here today as a live version for people to explore.

Stephan Livera:

Excellent. Well, I look forward to chatting again soon. Thanks, Rafael.

Rafael Schultze-Kraft:

Thank you very much, Stephan. It was a pleasure.

Leave a Reply