The Distribution of Bitcoin and the Cantillon Effect in 2020
By: Pedro Febrero Jr.
Tags: Economics, Blockchain, Cryptocurrency, Bitcoin Price, Bitcoin

The Distribution of Bitcoin and the Cantillon Effect in 2020

The Bitcoin halving took place during block 629,999 on May 11. The guys at F2Pool left a pretty memorable message on the block data which read “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue,” a brilliant callback to Satoshi’s message embedded on the first block. Well done, guys. You’re the real OGs.

As expected, the minting rate per block decreased 50%, from 12.5 bitcoin to 6.25 bitcoin, and the hashrate reached a new all-time-high, of 137.6 exahashes per second, according to BitInfoCharts.

At the time of the halving, BTC was trading around $8,500. What happened afterwards was an immediate shut down of a great number of machines, since the hashrate dropped over 37% in a matter of days. Currently Bitcoin is trading close to $9,800, according to Bitstamp.

Now that the halving has passed with a 50% cut in the supply rate of Bitcoin, what will happen to miners, hashrate and BTC price, in the medium — to-long term? Will there be a massive surge of new market entrants, much like it happened during 2016 and late 2017? Or will the price of Bitcoin drop further down, below $9,000?

Let’s take a quick look at the Bitcoin Futures aggregated by provider and daily volumes.

Image: Chart of BTC Futures, provided by Skew. Source: https://analytics.skew.com/dashboard/bitcoin-futures

According to Skew, it seems a great number of exchanges have picked up the pace, in terms of BTC futures volume. Not only that, but we’re noticing fresh blood entering the market. Will these new traders and investors bring additional liquidity and positive sentiment to the crypto-space?

To answer the questions above, we will take a look at some key on-chain metrics, which may help us identify the future behaviour of both Bitcoin miners and hodlers, and also clarify what really drives the adoption of Bitcoin.

In our opinion, we must look into the past if we want to get a clue into what we might expect in the future. Hence, we will analyse the impact of the Bitcoin halving on the market sentiment and on hodlers behaviour. Moreso, however, we will analyse how miners and traders are affected by price swings, in terms of profit and losses, and, finally, what is the relation between high value addresses and low value addresses.

I hope you’re ready for a fun ride.

This article was written by Pedro Febrero, Analyst at Quantum Economics and Founder at Bityond.

A Quick Intro to On-Chain Analytics

Before we dive deep into the charts, let us define the concept of “on-chain analytics.” Instead of focusing on price and traditional technical analysis techniques (TA), we will look into data that is natively stored on the blockchain.

This data includes (but is not limited to):

Details of every block (timestamp, fees, miner rewards, block weight, addresses, users, etc.)

Details of every transaction (sending and receiving addresses, the amount transferred in each transaction, the remaining addresses, block time, etc.)

Smart contract invocation and usage (mostly for Ethereum and Ethereum-based tokens).

In other words, while on-chain mining data volume is being used to judge whether a crypto asset is actually being supported, and when and how variations of the number of miners and the total hashrate may affect price and value, addresses and transaction data indicate how committed investors are to the king of cryptocurrencies.

Instead of just crudely measuring the overall usage of a cryptocurrency network, on-chain data may be useful to figure out who is mining and using Bitcoin, how miners and hodlers are supporting the network, and when certain metrics point to either bullish or bearish seasons.

In sum, our goal is to translate crucial blockchain metrics into price appreciation metrics so that we can make educated guesses about the future of bitcoin adoption.

What Metrics are We Looking Into?

Today, we’ll be focusing on Bitcoin users’ behaviour, how often addresses are at a profit and at a loss, and how the Cantillon effect takes place in the Bitcoin network. Essentially, we’ll be looking at:

Participants’ behaviour, as in how do different types of participants deal with bitcoin’s market volatility, and how does price appreciation further augment the number of participants. Addresses, as in the amount each address holds, the length of time the amount has been held, and individual behavior. Profit and losses, as in how many of the existing bitcoin addresses are in profit, and how many are at a loss and, What is the relationship between high value addresses and low value addresses. Does bitcoin flow mostly from top to bottom, that is, from high net-worth individuals and agencies to low value address groups, or does bitcoin flow from bottom to top?

By looking at some key charts, we hope to help readers understand what to expect now that bitcoin’s supply inflation is cut in half. Will prices crash, and along with it, miners and hashrate? Will the price skyrocket to new all-time-highs? Will bitcoin become further concentrated among top-tier addresses, and if not, to what extent is BTC being redistributed among low-value addresses?

I hope you’re ready to jump into the good stuff.

Miner Revenue and The Bitcoin Halving

To fully understand the effects that cutting the new supply of bitcoin in half may have on the price of BTC/USD, we ought to look into miner’s revenue — both from fees and from each block subsidy (inflation). More importantly, there are two grand hypotheses in regards to what the Bitcoin halving may bring to price action:

Assuming demand stays more or less similar, reducing the supply means reducing the incentives and profits of miners. Therefore, if miners have the same electricity costs, the price of BTC needs to increase, otherwise some miners won’t be as profitable and will leave the market. Additionally, miners who choose to sell their bitcoin for fiat or stablecoins, like USDT, will only have half of the bitcoin to sell, which theoretically could put upwards pressure on the price.

On the other hand, if the price remains more or less the same, less profitable and efficient miners leave. That means we’ll see some groups consolidating hashing power. As fewer miners are in the game, the difficulty of mining one bitcoin will diminish, as defined by the adjustment algorithm. Therefore, it will become cheaper to mint bitcoin, which means miner revenues could increase.

Let’s take a look at the chart below, showcasing how the miner’s revenue has been behaving through the years.

Image: Chart of Bitcoin displays miner revenue, provided by glassnode. (Source: https://studio.glassnode.com/metrics?a=BTC&m=mining.RevenueSum&mScl=lin&pScl=lin)

What we can see is that the revenue of miners, measured in bitcoin terms, has been falling in an expected and stable way. While before 2013, it reached a record high of almost 35,000 BTC per day, between 2013 and mid-2016, miner revenue did not go beyond 6,500 BTC per day, and since 2017, it peaked around 3,400 BTC per day. We should expect the trend to continue and for miner revenue to top somewhere between 900 and 1,300 BTC per day.

The vertical dots represent each of the Bitcoin halving events, the first in late November 2012 and the second in mid-July 2016.

Hence, we could assume fewer miners are playing the Bitcoin mining game, which is absolutely not true. According to BitcoinInfoCharts, a portal focusing on cryptocurrency statistics, the total hashrate has been growing exponentially throughout the years, and is currently near all-time-highs, around 123 exahashes per day.

Interestingly, hashrate keeps going up as more miners join the space, better and more specialized hardware is being developed for mining, and transaction fees continue to grow in value.

More however, the BTC/USD chart shows that price action seems to eventually keep up with a cut in supply. What this means is that after a short period of time, when price remains stable due to the adjustments between supply and demand, which normally comprises anywhere between 12 to 18 months, bitcoin sees a new all-time-high in U.S. dollar value.

What we can conclude is that, due to price appreciation, miner revenue in BTC terms will most likely continue to decrease, since each individual bitcoin is worth more in USD terms.

Net Unrealized Profit/Loss

To help us explain the relationship between miner revenue and the profits and losses of bitcoin hodlers, we should ask ourselves: what drives the price of bitcoin upwards?

The only truthful answer is more demand than supply. Or in other words, what drives price upwards is the adoption of bitcoin as a store-of-value, since buyers need to hold for long periods of time before selling. Therefore, adoption seems to be linked to price, which is probably one of the most important metrics for any investor or trader, since it helps tell us whether people believe in the Bitcoin technology.

Since miners need to sell bitcoin to keep operations running, there needs to be another side to the coin. Essentially, there needs to be enough currency coming daily to keep the price of bitcoin above a certain threshold. Not only that, but new entrants should be able to profit from hodling bitcoin and then selling at peaks, as this is their main incentive to hold onto BTC for long periods of time.

Which brings us to the below chart.

Image: Bitcoin net unrealized profit/loss chart, by GlassNode

To explain our point of view, allow us to go deeper in the chart above, which shows the Bitcoin net unrealized profit/loss. The author of the chart defines Bitcoin net unrealized profit/loss as how much of bitcoin’s circulating supply is at any given point in time in profit or loss — and to what extent. The profit (loss) of a bitcoin is calculated by taking the difference between the current price and the price at the time the bitcoin last moved. Then, the author divides the unrealized net profit from the net losses.

At the time of this writing, there have been four accumulation cycles and three sell-off cycles, which do coincide with the halvings. While investors mainly buy bitcoin during accumulation periods, investors switch back to fiat currency during sell-off periods since there is a clear discrepancy between the price of a single bitcoin and the perceived value of the total network.

Let us elaborate:

Prior to 2011, few people knew about the Bitcoin protocol. Hence, the confidence bands above were below yellow. Therefore, the price of each bitcoin was much lower than the perceived network value.

From early 2011 until mid-2011, the price of bitcoin skyrocketed, reaching close to $30. During that period, confidence grew, and the price of each bitcoin clearly surpassed the perceived network value, triggering the very first sell-off. At its peak, net unrealized profits surpassed 75%, meaning most bitcoin was being sold at a profit.

From June 2011 until April 2012, early investors sold massive amounts of bitcoin, which were accumulated during the early days of the project. BTC/USD went below $3 and confidence only picked up after bitcoin broke the $5 range. At its lowest, net unrealized losses were below 1.5, or 150%, which means there was no bitcoin being sold at a profit.

Only after January 2013, we noticed confidence picked up again. This allowed early investors to have an opportunity to re-accumulate at low prices, mostly between $5 and $14, between April 2012 and January 2013.

Until late December 2013, during almost one year, hodlers had an opportunity to sell bitcoin at two different tops. The first was during April 2013, when BTC/USD touched $180, and the second was in December 2013, once bitcoin surpassed the $1,000 mark. Investors’ confidence grew strong while over 75% of all bitcoin was being sold at a profit. The highest point was reached close to the $1,000 top, when over 82% of all bitcoin sold was at a profit.

Between December 2013 and November 2015, bitcoin entered a bear market, and most BTC/USD fluctuated between $200 and $300. Investor confidence was quite low, and this was a period of heavy accumulation. The difference between the actual price of bitcoin and the perceived network value reached a low in January 2015, once price bottomed near the $211 mark. At this time, over 50% of all bitcoin being sold was at a loss.

From November 2015 until December 2017, it was a great time to sell bitcoin. When BTC/USD reached its top, close to $20,000, the confidence bands showed a clear over optimism. At its peak, over 77% of all bitcoin in circulation were being sold at a profit. Beautiful times.

Since late January 2018, bitcoin broke $10,000, and confidence took a massive hit. Only in December 2018, when BTC/USD touched $3,400, we saw the capitulation reaching its maximum. At this time, close to 50% of all bitcoin were being sold at a loss.

To wrap up this chapter, let us share with you the most important conclusions we arrived at.

Anytime there is no bitcoin being sold at a profit, it’s a good time to buy. On the other hand, when 50% or more of all bitcoin is being sold at a profit, it’s a great time to sell. More importantly, this is what we want you to burn into your mind: the number of hodlers selling bitcoin at a loss has greatly diminished through BTC’s short life.

That is, while during the first sell-off over 150% of all bitcoin was sold at a net loss, on the bottom of the next cycle, only 60% of all bitcoin was sold at a net loss and, finally, during the last cycle’s bottom, less than 50% of all bitcoin was sold at a net loss.

What the data shows is hodlers selling less bitcoin during sell-offs, and that no more than 80% of all bitcoin in circulation gets sold at a profit, meaning, there are close to 20% of hodlers who never sold their stack.

The most important attribute about the metric above is the fact it can be used to assist cryptocurrency enthusiasts that go beyond simple hodling. It can help them to avoid buying close to the top and selling near the bottom of bitcoin’s cycles.

Next, we’ll look into address data and how the amounts held by each address group has been evolving.

Bitcoin Address Data

Image: The chart of the Bitcoin network addresses holding at least 1,000 BTC vs no less than one BTC vs at least 0.1 BTC, by GlassNode

To help readers understand if profits are being distributed fairly, from high-value accounts to low-value ones, we would like to discuss addresses and amounts held by addresses, namely to show how the Cantillon Effect happens within Bitcoin. To put it simply, the Cantillon Effect describes how prices are affected by the currency in circulation.

When we refer to the Bitcoin Cantillon Effect, we mean how bitcoin gets distributed from those near the “printer” — miners and early adopters — to those coming afterwards. Perhaps one day, someone may compare these results with the distribution of fiat currencies, and conclude how much more equal, or inequal, the distribution of bitcoin is.

Moving forward, the reason why we’re looking to compare growth between addresses is quite clear: Bitcoin addresses show the behavior of BTC holders. The main data we’ll now be looking into is the number of active addresses and how much each one holds.

In addition, you’ll notice how the chart is based on growth: even though the number of addresses with at least 0.1 and at least one bitcoin are far greater than the number of addresses holding at least 1,000 BTC, the growth rate of the latter is greater than the first two groups. Another way to look at it is to measure the slope of the curve.

The reason we think looking into the growth of addresses is key is because such metrics may help us understand how people behave during bullish and bearish seasons, and if our previous conclusion about the long-term behaviour of hodlers survives against these new metrics.

Essentially, we can split the chart into three main periods:

Prior to 2011. During this period there were almost no addresses holding at least 1,000 BTC. This is quite logical, since there hadn’t been enough participants in the Bitcoin network. What this means is that once network effects started to pick up, the number of participants holding at least 1,000 BTC immediately increased. Mining rewards started to concentrate among a few players, which can be noticed by the number of addresses with ≥ BTC 1,000 increasing from near zero, to over 365 in early January 2011. Not only that, but addresses holding over one bitcoin reached close to 58,000 around the same time, from a total of almost 30,000 in early 2010; addresses holding less than one bitcoin came close to 60,000, increasing significantly as well from a total of 30,000 in early 2010. You’ll notice how these values will change within the next time interval.

Between 2011 and late 2017, there was a huge spike of all addresses. In sum, addresses holding at least 1,000 bitcoin increased from just under 400 to a peak of just under 1,900 in mid-2016 — which represents a 475% jump. Additionally, addresses holding at least 0.1 and at least 1 bitcoin also grew massively. The number of addresses holding at least one BTC surpassed 500,000 in early 2016, while the number of addresses holding at least 0.1 BTC surpassed one million in the same period. 2017 was a very interesting year. As bitcoin price skyrocketed towards all-time-highs, the second cross between the growth rate took place. Essentially, if in the previous time-frame, prior to 2011, we saw the growth rate of addresses holding at least BTC 1,000 surpassing addresses holding a minimum of 1 and 0.1 bitcoin, this time the opposite happened: in sum, there were just over 1,700 addresses holding at least 1,000 BTC, and 630,000 addresses holding at least one bitcoin when the cross took place; and around 1,600 addresses holding a minimum of 1,000 BTC and over 2,300,000 addresses holding at least 0.1 BTC when the next cross happened. Price appreciation in USD terms, helped with the massive flux from high value addresses, to low value addresses.

After 2018: during this period we notice the exact opposite happens. Essentially, in early 2018, addresses holding a minimum of 1 and 0.1 bitcoin reached their tops, around 718,000 and 2,600,000, whereas addresses holding at least 1,000 bitcoin reached a bottom, around 1,600. Soon afterwards, the trend reversed and has since been quite steady, as the growth in the number of high value addresses has again surpassed the growth in the number of addresses holding a minimum of 0.1 BTC, during July 2019. More however, In October 2019, the growth in the number of addresses holding over at least 1,000 bitcoin surpassed the growth in the number of addresses holding one bitcoin. Soon after, we start to notice a decline in the number of high value hodlers, as the growth in the number of addresses with at least BTC 1,000 is now in-between the growth of addresses with a minimum of 01. BTC and one BTC, respectively.

The first conclusion we can draw is as price was reaching its peak in late 2017, in terms of USD value, early adopters (those holding at least 1,000 bitcoin) started to sell massively, which triggered a move to the downside, between addresses with at least 1,000 BTC and addresses with a minimum of one BTC and 0.1 BTC. The exact opposite happened as soon as early adopters sold their bitcoin stacks. Soon after, the price of bitcoin in USD terms started to drop.

Not only that, but as the price of bitcoin continued to go down, and reached a low in late 2018, we see a massive increase in the growth rate of high value addresses. What this data shows is early adopters recouping some of their old coins in order to prepare for the next bull market.

This logic can be falsified, if in the next bull-run we do not see a decrease in the number of addresses holding at least 1,000 bitcoin and a massive increase in the number of addresses holding a minimum of 0.1 and one bitcoin.

We also suspect there will be another cross to the downside, in terms of the growth rate of high value addresses versus low value addresses, if the above happens.

This scenario may explain how the Cantillon Effect takes place in the Bitcoin network, which we’ll discuss in the next chapter.

The Bitcoin Cantillon Effect

Image: “What is the Cantillon Effect?” (author)

The Cantillon Effect was first described by Richard Cantillon, a French economist, as the uneven expansion of the amount of money.

Adding to that, as described by the Mises Institute, “the Cantillon effect indicates that money is not neutral because inevitably it is injected unevenly, creating economic distortions. These distortions are important to the long run and the Austrian theory of the business cycle.”

Even though the Bitcoin protocol protects the network from any player who wishes to mint new coins, outside the programmed minting rate, an analogy can be made between those with easy access to coins — because they were early adopters — and those with less access to bitcoin.

Essentially, miners and early adopters are the ones with easy access to the bitcoin “printer,” although none can easily print new currency, since each bitcoin is quite difficult to produce (high hardware and electricity costs).

To make the analysis whole we have devised a rather clever chart, which directly links the Cantillon Effect with the data from addresses, showing how greatly bitcoin is being distributed from high net worth accounts to low net worth accounts.

Image: The distribution of the volume of BTC held by addresses ≥ 1 and ≥ 0.1 versus addresses ≥ 1000 bitcoin

In order to create this chart, we’ve calculated the volume per address group, by multiplying the amount each address category had on roughly the third day of every month, by the price of bitcoin on that day, and then dividing the volume held by addresses with at least one BTC and 0.1 BTC, by the volume held by addresses with a minimum of 1,000 BTC.

The conclusions we draw are quite interesting, in terms of how fair the distribution of bitcoin really is. However, before we dive deep, let us make a few assertions and explain why we believe this metric is of the utmost importance for the future adoption of bitcoin, as a global currency.

While some crypto-enthusiasts don’t think it’s fair early adopters are disproportionately compensated, as they had the ability to easily mine bitcoin, one needs to keep in mind it was that same incentive that brought these early adopters to the Bitcoin network.

If not for that incentive, what would be the main driver for early adopters and miners to waste time and electricity mining a low-value currency like bitcoin? Additionally, we support the thesis that people who take on more risk should be compensated for doing so.

What we mean is the following: without disproportionately compensating early adopters, the number of people who would have participated earlier, in the bitcoin space, would probably be much lower, since there would be fewer incentives for mad gains.

Additionally, for early adopters to profit from BTC versus fiat currencies, they need to sell their BTC for fiat. Therefore, they accept the cost to depart some of their bitcoin, distributing it by late adopters, since there is a huge premium paid in fiat currency.

Now that our position about the distribution of bitcoin being fair is clear, let us dive into the chart, which will help us with our main argument.

What the data shows is something rather spectacular. The percentage of the total bitcoin volume held by addresses with at least one and 0.1 bitcoin seems to be growing compared to the addresses containing a minimum of 1,000 bitcoin, which shows how evenly BTC is being distributed.

In sum, since 2013, when the percentage of BTC volume held by both addresses with at least 1 and 0.1 was lower than 15%, that fraction has more than doubled.

Since 2013, the number of BTC held by addresses with a minimum of one and 0.1 bitcoin more than doubled, from 15% to over 30%. At its peak, the amount of bitcoin volume held by addresses with at least one BTC was almost 45% of the total volume of bitcoin held by addresses with no less than 1,000 BTC. Interestingly, this top coincided with the BTC/USD all-time high.

Not only that, but the amount held by addresses with at least 0.1 bitcoin also grew exponentially and, at its peak, touched 35% of the total volume of bitcoin held by addresses with a minimum of 1,000 bitcoin.

Therefore, the distribution of bitcoin from high value accounts to low value accounts keeps growing with time. What is the main driver? It seems to be price appreciation. As early adopters convert some bitcoin into USD, they also distribute it to late entrants.

Because bitcoin has an upper limit of coins that can be created, close to 21 million, it’s impossible for early adopters to take advantage of newly printed currency, since they need to spend more energy than before, to produce a new unit.

This concept makes the Cantillon Effect much fairer in the Bitcoin network, when compared to fiat currencies, simply because in the latter, there are central banks that can mint new currency at near-zero cost.

Conclusion

To conclude this rather extensive piece, and to share our final thoughts with you, we would like to wrap up what was said before.

First, we concluded that the BTC/USD chart shows that price action seems to eventually keep up with a cut in supply. Miner revenue shows how price needs to adjust upwards, in U.S. dollar terms, for the diminishing revenue in bitcoin still compensates for those mining.

This means, so far, that the less bitcoin there is available, the higher the chances are that bitcoin sees new all-time highs, at least in U.S. dollar terms. Historically, this price gauge happens between 12 and 18 months after the halving event, which explains why revenue from selling bitcoin remains volatile, and why it’s possible for miners to receive fewer coins for their work and still be profitable.

Secondly, we’ve discussed how the number of hodlers selling bitcoin at a loss has greatly diminished through BTC’s short life. At the time of this writing, no more than 80% of all bitcoin in circulation gets sold at a profit, meaning, there are close to 20% of hodlers who never sold their stack.

Thirdly, we noticed how the growth rate of addresses holding at least 0.1 or one BTC has been increasing at a faster pace than the addresses holding a minimum of 1,000 bitcoin. This shows how the Cantillon Effect happens in bitcoin, and helps us measure it.

Finally, we concluded that bitcoin is a fair currency because BTC is being distributed from high-value addresses to low-value ones. Additionally, that distribution is increasing as time goes by, meaning the growth rate of low-value addresses is higher than the growth rate of high-value addresses.

Therefore, we can expect that for profits to be made, bitcoin needs to be sold to new participants at a higher price than the price at which it was acquired (in U.S. dollar terms). This “Cantillon Effect” explains why and how those with access to more bitcoin, due to entering the market first, distribute bitcoin to newer market participants.

We hope this piece may help you in your future trading and research endeavours, and we’re happy to consider different views to further our discussion on the adoption of the Bitcoin protocol.

Safe trades!

Pedro Febrero is the founder of Bityond, a recruitment and ATS SaaS with a decentralized governance model, and an analyst for Quantum Economics. He has penned over 800 articles in the cryptocurrency space and been involved with blockchain technology since 2016. Follow him on Twitter @Febrocas.