Analysing Exchange/Miner Flows
In this article, we’ll explain how flows from miners to exchanges and general flows into/out of exchanges can help determine sentiment and identify potential turning points in the market for cryptocurrencies like bitcoin (BTC) and ether (ETH).
We’ll look at three types of flows to exchanges can provide a useful tool for traders:
- Miner-to-exchange flows
- Exchange inflows
- Exchange outflows
1. Miner-to-Exchange Flows
Miners are natural sellers of bitcoin, where they use fiat currency to pay for capital expenditure (e.g., mining rigs) and operating expenditure (e.g., electricity) but their revenue is denominated in bitcoin.
Since bitcoin’s price can fluctuate drastically, miners have been the most significant source of selling pressure. If miners sell a larger amount of BTC, then this may depress prices as more available supply becomes available whereas if miners HODL, then it indicates that they are operating comfortably and are likely to have a positive outlook for the price of bitcoin.
Since every on-chain transaction is publicly available, data from the blockchain can be used to quantify the outflows from miners to exchanges. A coinbase transaction creates new coins and miners tag these blocks to show that they mined it. The tags can be used to label mining pool wallets that receive the coinbase reward. By combining the coinbase address and reward address, we can ascertain how much BTC miners are holding or transacting. A similar method can be used to identify exchange wallets and balances.
Price action and volume can change rapidly when there is a large outflow from miners. If we consider a movement of a large amount of BTC from a miner, then we can deduce that these miners may be cashing out to support their operations. Therefore, large spikes in miner outflows may be indicative of a strong resistance level and predict an imminent local top in the price of bitcoin.
Therefore, investors and traders can utilise the data on the transfers to exchanges from bitcoin mining pools to understand miner behaviour and sentiment, and these flows are likely to impact the market if they are relatively large. A large flow from miners to exchange are typically found at turning points in the market. We often find spikes in miner-to-exchange outflows at tops when the price is rising or at bottoms when the price has been in a downward trend. Miner outflows can be visualised on analytics websites such as Glassnode, CQ.Live, TokenAnalyst and Chainalysis to name a few.
During a rising trend in the price of bitcoin (shown by the black line), if there is a large flow from miners to exchanges (red line), then it may indicate that sell pressure is mounting and there’s a higher chance that the trend will come to an end. For example, we see that on October 28, 2019 there was a large outflow of more than 2,400 BTC to exchanges which followed a large pump in the BTC-USD. Below, we show the miner outflows to exchanges available at CQ.Live.
After this higher than usual outflow (which accounted for 150% of the block reward for a single day) the price fell from $9,200 to below $8,000. The large miner outflow to exchanges would’ve given an indication to someone who had a long position in bitcoin to look for other signs to exit the trade or move their stops up higher to reduce risk in case a downturn materialised. Alternatively, a trader that wants to go short could look for technical signs after seeing a large transfer from miners to get further confirmation.
On February 6, 2020, a large inflow from mining pools into exchanges occurred while the market was trading below $10,000 and would’ve given a signal that a top in the rally from $7,000 was near, before the local high of $10,350 occurred on February 14. Following the large transfer and after the price of bitcoin peaked, BTC-USD then reached lows around $8,500 by March.
Also, prior to the block subsidy halving in May 2020 there were two large spikes in the mining pool outflows to exchanges of around 1,800 BTC which was closely aligned with the local top at $9,800, confirming strong resistance just below $10,000 as the market remained subdued below this level for some time.
Another example is shown below for the most recent local top in August 2020. On August 14, more than 1,200 BTC were sent from mining pool addresses to exchanges and a few days later bitcoin’s price peaked above $12,400. This outflow was the one of the largest since the block subsidy halving during May and is greater than the total of the block subsidies earned by all miners in a single day (~900 BTC).
Sometimes a spike in exchange flows from mining pools doesn’t coincide with tops in the market and is just one tool you can use which is best combined with on-chain indicators and fundamental/technical considerations.
For instance, after the downturn between February and mid-March, we see three large spikes in miner-to-exchange flows which coincided with a local bottom with the first spike of more than 2,800 BTC closely aligned with the bottom. A large flow between miners and exchanges occurring after a falling market could indicate that sell pressure has been exhausted, which should eventually lead to a rising price.
After three large spikes in the miner-to-exchange outflows, the daily miner-to-exchange flows are reduced between April 3 to April 29, mostly below 600 BTC per day. During this period, once the sell pressure has been mostly exhausted from the miners, the price rose from $6,740 to $8,750.
One drawback of using this data is that a transfer from a mining pool to an exchange does not necessarily translate directly into selling pressure, as there’s no way of knowing if miners sell straight away on the exchange. These statistics also do not account for bitcoin sold in the Over The Counter (OTC) market, which is used to ensure that large bids do not impact the price of bitcoin.
Traders can also look at flows into and out of exchanges to help confirm whether sentiment is bullish or bearish:
- An increase in inflows to exchanges may indicate greater selling pressure, as traders/miners move coins to sell for fiat.
- Another interpretation is that a rise in inflows to exchanges indicates greater trading activity, which may be bullish for BTC.
Exchange outflows can be visualised on analytics websites such as Glassnode, CQ.Live, TokenAnalyst and Chainalysis. You can view exchange outflows on a block-by-block basis to detect higher likelihood of selling pressure over the short-term, or look at the hourly/daily outflows to determine how trading activity is evolving.
An increase in inflows to spot exchanges may indicate greater sell pressure as traders move BTC to spot exchanges to sell their holdings. For instance, the chart below shows that inflows increased around June 23-24 on an hourly basis and preceded a large movement to the downside. On June 23, bitcoin was trading around $9,650 as spot inflows increased to over 2000 BTC and as the downward move gained momentum.
Large inflows to spot exchanges are circled on the chart and continued while the price moved downward. Bitcoin’s price eventually reached lows below $9,000 on June 28 as the inflows to spot exchanges died down.
Another example is shown below:
The hourly inflows to spot exchanges increased sharply on September 2 which continued into September 4 as the price fell from above $11,000 to a low of $9,940 by September 5.
Taking the other interpretation (higher inflows -> more trading activity), a spike in inflows may be considered bullish. For instance, after the crash in March 2020 we saw a large inflow to exchanges, presumably as traders wanted to go long after a sharp downward move.
After large inflows following the sharp drop in bitcoin’s price, the price went on to rise over the course of April and early May. Traders can also use the moving average of exchange inflows to determine the level of trading activity. For instance, with a rising moving average of inflows over a 180-day period, then it indicates that trading activity rising which could be interpreted as the market is generally bullish in terms of sentiment, as more bitcoin is being deposited to trade - higher volume usually precedes higher prices.
Traders can also look at the number of transfers to exchanges, instead of the BTC amount. Spikes in the number of transfers to exchanges often correspond with local tops in the price of bitcoin.
For instance, the chart below from glassnode shows that spikes in the number of transfers to exchanges have occurred around the time prices have reached a ceiling. For example, below we see that transfers spiked in June 2017, when BTC-USD reached an all-time high at the time above $3,000. The largest ever spike in transfers to exchanges occurred shortly after bitcoin’s all-time high near $20,000 in January 2018.
We can also see spikes in transfers to exchanges that correspond to the 2019 high just under $14,000, when almost 90,000 transfers to exchanges in a single day. Also, we see in December 2018, transfers to exchanges reached almost 70,000 just before bitcoin fell from $6,000 to lows near $3,000.
Another source for analysing exchange flows is Chainalysis. A nice feature of Chainalysis’ inflows data is that you can compare inflows to exchanges easily with the 7-day, 30-day, 90-day and 180-day averages so you can see where inflows have exceeded these values, For instance, we saw on September 21 inflows of more than $900 million, greater than all of these averages suggesting strong sell pressure. On the same day, bitcoin fell 4 percent.
Outflows from Exchanges
We can also look at the outflows from exchanges which can be interpreted in one of two ways:
- Traders moving coins from exchange to HODL, which may indicate bullish sentiment.
- Another interpretation is that a rise in outflows to exchanges indicates reduced trading activity, which may be bearish for BTC.
As shown by the chart below, often a rapid rise in exchange outflows occurs during a rising trend and predicts further upside moves as more coins are stored in wallets rather than exchanges, and implies that perhaps the rate at which traders are selling bitcoins is slowing.
Traders can use the moving average of exchange outflows to determine the level of trading activity. For instance, if the moving average of outflows over a 180-day period is falling, then it indicates that trading activity is decreasing which could be interpreted as the market is generally bearish in terms of sentiment, as more bitcoin is being withdrawn and lower trading volume usually precedes lower prices.
We can also look at the number of transfers out of exchanges. The chart below from Glassnode shows that spikes in the number of withdrawals often coincide with turning points in the market. In a rising market, a spike in outflows could be considered bearish since trading activity is falling and lower volume precedes lower price. For instance, for the bull run of summer 2019, the number of transfers from exchanges reached a multi-year high as prices approached $14,000. As this large spike occured during an uptrend, then it could have been a signal to exit longs or go short in anticipation of lower trading activity.
On the other hand, if there is a spike in the number of withdrawals from exchange following a ranging or falling market, then it could indicate lower selling pressure and may indiciate that more traders are HODLing, which could be bullish. For example, a spike in outflows in April 2019 preceded an upward trend, perhaps as traders and investors moved coins off exchanges after ranging price action in anticipation of a bullish run.
To receive updates on exchange/miner flows, you can join the CryptoQuant Alerts Telegram channel which will provide the latest developments in terms of flows for BTC in real time.
Miner-to-exchange flows can be interpreted as selling pressure, as miners must cover their costs by selling the BTC/ETH they’ve mined. A large spike in miner-to-exchange flows could be indicative of a major resistance or selling pressure. Conversely, a low flow of bitcoins from miners to exchanges may indicate that miners are bullish and are HOLDing to sell at higher prices.
An increase in exchange inflows over the short-term could be interpreted as selling pressure (especially for spot exchanges) as traders move funds to sell for fiat. On the other hand, an increase in exchange inflows over the long-term could also indicate greater trading activity and be a sign of bullish sentiment.
An increase in exchange outflows over the short-term could be interpreted as bullish sentiment as more coins are taken off exchanges, and may be indicative of reduced selling pressure. As more coins are flowing out of exchanges, this suggests more traders are HODLing and could precede upswings in the price of bitcoin. An alternative interpretation is that there is less trading activity, which suggests interest in the underlying trend may be fading and an increase in outflows may precede a turning point in the market.
Therefore, analysing flows requires careful interpretation. By themselves, exchange flows are not an entirely reliable indicator of trend continuations or reversals. Rather, the data on flows to and from exchanges can be used to complement other forms of analysis, such as technical analysis to confirm a signal. When there is a convergence between data on exchange flows and technical analysis, then it could provide more reliable signals than using these tools in isolation.