A pandemic, followed by global societal shutdowns, followed by rampant social unrest, followed by increased political polarization, followed by unprecedented levels of monetary interventionism.

This has been 2020.

And in the midst of all of this uncertainty and chaos, a Bitcoin bull market brewed. 

Two competing theories have transpired to explain BTC’s rapid rise to $19,000. Some have speculated that this rally is being predominantly driven by increased regulatory scrutiny in China, which has prevented miners and market participants from selling their BTC. Others attribute it to increased institutional participation after Bitcoin received a trove of endorsements from high-profile macro investors.

In this post, we will evaluate the merit of each of these narratives through the use of network data. 

Are Miners Driving This Rally? 

It is no secret that Beijing has been cracking down on Bitcoin businesses, from miners to exchanges. Earlier this month, news broke that both Huobi and OKex, two of the largest exchanges operating in China, were facing stronger regulatory scrutiny as part of the country’s new mandate to fight money laundering and fraud. Now, local industry observers have reported that the bank accounts of many Shenzhen miners have been frozen as part of this regulatory crackdown.

Media outlets have hypothesized that the recent run up in Bitcoin’s price was a direct result of this crackdown. If miners are unable to sell their BTC, a sustained disruption in the existing supply chain would ultimately generate scarcity. Thus far, however, solid evidence of the impact of the crackdown on mining operations has been anecdotal. Thankfully, we have devised metrics to assess this impact more objectively by tracking the movements of newly issued BTC.

Over the course of 2020, we have closely analyzed the on-chain custody behavior of both mining pool operators and their individual miners. We have found that unspent miner rewards provide a good proxy for aggregate mining pool custody. Since mining pools issue payouts to all of their participants, supply that sits 1 transaction from mining pools is a good representation of the holdings of individual miners. The culmination of this research was a new family of metrics released in October that can provide a view of when these network participants are accumulating, or disseminating, the bitcoins they mine.  

On an aggregate basis, the amount of Bitcoin held by mining pool operators has increased over the course of 2020. Notably, there was a sharp spike in April ahead of the halving and a steady increase followed. Conversely, Bitcoin held by individual miners has decreased in 2020, and at a particularly increased rate in November. 

If, in fact, there was a liquidity crunch predominantly driven by miners, one would expect the amount of BTC held by both pools (purple) and individual miners (green) to increase. Since individual miners are the liquidity gateways of newly issued bitcoins, any supply chain disruption would entail an increase in their holdings, whereas the opposite seems to be taking place.

Another metric that suggests miners have been able to sell their BTC as usual is the aggregate value of bitcoins sent by them. If miners were unable to sell their BTC, the aggregate outflows from their account would likely drop. However, that does not seem to be the case. As of November 21st, 809,217 BTC has left miner accounts. At this pace, the sum of bitcoins sent by miners in November will surpass the yearly average of 1,052,589 BTC sent per month.

Coupled with the aforementioned data on BTC held by miners, the lack of a clear change in miner outflows discredits the hypothesis that miners have not been able to sell as a result of a regulatory crackdown in China. 

Another troublesome factor in attributing the rally to miners is the size of BTC markets. At a market cap of over three hundred billion dollars, it is very unlikely that a rally of this magnitude could have been caused by miners alone. After all, miners are disincentivized to hoard BTC. They are rewarded in a volatile currency, whereas their operations entail monthly expenses paid in fiat. As such, their impact on the market decreases as less BTC is issued.

Nearly 100B USD was added to BTC’s total market capitalization over the course of November. It is hard to envision a scenario where miners alone were responsible for it given that they have received just shy of 360M USD thus far in November. As such, any impact of the regulatory crackdown on liquidity would likely be limited to that, which is too small to an impact of this magnitude.

The Role of Centralized Exchanges

Now, let us look at the on-chain footprint of centralized exchanges and assess their impact on the recent rally, not only in the context of increased regulatory pressure in the East, but also in light of other factors impacting exchanges in the West.

Historically, exchanges operating in China have been the primary target for regulators. It was no different this time. On November 2nd, Huobi’s Chief Operating Officer was reportedly arrested by Chinese authorities, although Huobi has denied the reports. In the days following the reports, Huobi experienced a mass withdrawal event as users grew worrisome. That resulted in a 60k BTC being withdrawn; a loss equivalent to 1B USD in deposits. 

Interestingly, Huobi is not the only exchange to experience a decrease in deposits. Over the course of 2020, the percentage of total BTC supply held by major exchanges has decreased on an aggregate basis, even if we remove Huobi from the equation. We have noticed an aggregate reduction of BTC holdings by the major exchanges we support (Bitfinex, BitMEX, Binance, Bitstamp, Bittrex, Gemini, Kraken, and Poloniex).

Even though Beijing’s crackdown on Bitcoin businesses has undoubtedly impacted Huobi, there might be other factors reducing assets-under-custody by exchanges in the West.

Stablecoins might have contributed to this decrease. For context, the total stablecoin market capitalization grew by a factor of 3 year-to-date, from 5.8B USD in January to a whopping 17.8B as of November. Since one of the biggest benefits of having deposits on centralized exchanges are fiat on/off-ramps, stablecoins might be competing for some of that utility. We have explored some of this in our report The Rise of Stablecoins, which provides an in-depth review of the drivers of stablecoin growth.


Another contributing factor might be the rise of “wrapped” versions of Bitcoin. While stablecoins might provide utility equivalent to an exchange’s fiat on/off-ramps, wrapped BTC might compete for other exchange services, such as lending.

Like stablecoins, Wrapped BTC (WBTC) and RenBTC (RENBTC) operate on the basis of user deposits of the underlying asset. Once the asset is deposited, a receipt is issued on an Ethereum smart contract, which then enables the asset to be used in Decentralized Finance (DeFi) applications, such as decentralized exchanges and lending pools.

The trade-offs between using centralized exchanges vs. wrapped assets are similar. In both scenarios, the depositor no longer has custody of the underlying asset. Although decentralized exchanges on Ethereum are far less efficient than centralized order book exchanges, the former offers access to a plethora of newly-issued assets. Additionally, holders of wrapped BTC can use it as collateral for loans and receive “yield” on their holdings. As such, the added utility of wrapped assets has likely contributed to the decrease in BTC held by major exchanges.

2017 Looks Different 

Although stablecoin issuance and WBTC have likely impacted overall AuC by centralized exchanges, these are still emerging trends. In order to understand why exchange AuC did not follow the rapid increase in prices, let us go back to the 2017 bull market.

On a relative basis, the 2017 bull market had an entirely different on-chain footprint than what we are witnessing today. Back then, BTC held by exchanges nearly doubled as BTC flirted with $20,000 USD for the first time.

Intuitively, it makes sense that a retail driven rally would increase BTC held by major exchanges. Since there are clear educational frictions in self-custodying assets, many retail investors prefer to defer custody to centralized service providers. Even though the industry has come a long way, especially in terms of hardware options for self-custody, there is still a steep learning curve that makes newcomers gravitate towards centralized exchanges.

So why isn’t BTC held by major exchanges increasing?

If the rally we are witnessing was retail-driven, the 100B USD added to bitcoin’s market cap would have likely been predominantly held on centralized exchanges. While it is true that our estimates are not capturing emerging exchanges, such as Deribit and FTX, Coinbase (given that they do not re-use addresses), or new on-ramps such as Paypal, one would still expect to see an increase in AuC on these established markets. However, the opposite seems to be taking place.

This suggests that there are other forces at play. On Nov. 21st, news outlets reported that Coinbase’s institutional AuC grew from 6B in April to 20B by 4Q20. If this rally is being driven by an influx of institutional investors, that would explain the downward trend in AuC by exchanges. Since institutional investors tend to operate predominantly in OTC markets, they bypass retail exchanges. 


In conclusion, our analysis of miner behavior coupled with custody data on Huobi shows no evidence to suggest this rally is being predominantly driven by a regulatory crackdown in China. The downward trend in AuC by retail exchanges may be an indication that this rally is being driven by increased institutional adoption. Given the use of OTC on-ramps, an increase in institutional participation would result in positive price action, but limited on-chain footprint, which is what we might be witnessing in this bull market.