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RESEARCH NOTE 5 February 2023

Bitcoin Whale Watching

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Large investors accumulated heavily during 2022. Annual growth in ‘whale’-sized addresses hit an all-time high. Annual growth in large addresses accelerated to the highest pace since 2018. Bitcoin’s user base grew by an estimated 10% in 2022. Large investors make up a large portion of that growth. Metcalfe’s law implies that bitcoin’s value increased by 20% during that time. That increase was obscured by the price correction from extremely overvalued to (now) somewhat fairly valued. Bitcoin adoption is clearly growing in institutional circles despite whatever narrative is playing in the press and it is doing so against adverse price conditions and a weakening macroeconomic environment.

Growth by Size While price fell, total network size as measured by non-zero addresses grew by about 10% in 2022. This implies an increase in bitcoin’s network value of about 20%. This growth can be attributed to the largest bitcoin investors. Only the smallest group, the group with less than 0.001 BTC, did not accumulate in 2022. These small holders make up 74% of bitcoin users but hold less than 36,000 BTC. A typical address probably holds less than $20. All other groups accumulated, with whales (addresses that hold more than 10,000 BTC) being the fastest-growing group. Whales are an exceptionally small stratification of users,

2022 Growth in Bitcoin Addresses

44 43

50 45 40 35

15 10

Jan Mar May Jul Sep Nov Jan 2022 2022 2022 2022 2022 2022 2023

This group held about $26 billion in bitcoin in early 2022. As bitcoin price fell, it lost about 16 billion dollars as the market price declined. As price fell, these investors added 15 billion in additional outside capital finishing with about $25 billion at the end of 2022. Year Over Year Growth in Bitcoin Addresses by Size

Thousands

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Net flows into bitcoin were on par with those of US equity funds. There was more investment into bitcoin in 2022 than there was into gold, oil, and agriculture funds combined.

Price

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numbering about 100. Accordingly, this group can grow the fastest based on relative size alone – a few additional users make for a large percentage change.

Addresses with a balance Millions

Executive Summary

5 February 2023

80%

small

60% 40%

whale

medium 20%

large

0% -20% -40%

This investment behavior is consistent with a “constant mix” strategy whereby investors seek to hold a constant allocation of investments. It is inherently contrarian, where rebalancing forces the investor to buy low and sell high. Sovereign funds, pensions, and other infinite-life institutional portfolios are likely to employ such a strategy. Number of Whales (> 10,000 BTC)

Bitcoin Whale Watching

5 February 2023 User Growth and Price Changes

130

We looked at the correlation between price changes and stratified user growth on a 365-day rolling basis. This creates a scale from -1 to +1 that allows us to examine investor behavior relative to bitcoin price movements.

120 110 100

A value between 0 and +1 indicates momentum investing behavior. Users buy when price goes up and sell when price goes down.

90 80

A value between -1 and 0 indicates contrarian investing behavior. Users buy when price goes down and sell when price goes up.

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

The red line at the bottom serves as a reference to help identify when bitcoin’s price was rising or

Bitcoin Price and User Growth: Rolling 365-Day Correlations

The number of whales now stands at the highest level since 2019. Large addresses (holding between 10 and 10,000 BTC)–which also likely represent institutional and money manager ownership–grew at the fastest rate since 2018 and have been accelerating since 2021.

Bitcoin Whale Watching

falling. Momentum investing dominated from 2018 to 2021. After that, small, retail investors continued to buy in rising markets and sell in falling markets. Institutional and professional investors took the opposing side of the trade.

5 February 2023 2022 was remarkable in that large and whale investors became rabid buyers early in 2022 as the price began to fall. The high negative correlation indicates that growth in the number of users increased dramatically as the price fell ever lower. Small investors have tapered their selling recently, around November 2022. Beginning in 2023, whales and larger investors have slowed their purchases.

Fund Flows Comparison Approximately 2 million new addresses with nontrivial balances were established in 2022. We conservatively estimate that the mid- to whalesized addresses increased their BTC balances by at least 270,000 coins. Small addresses added 300 coins. Just over 330,000 new bitcoin was mined in 2022. Ignoring irretrievably lost coins (see “There will never be more than 14 million bitcoins.”) these coins were either held by miners or sold. While sales and purchases occur throughout the year, the net change in bitcoin held by miners in 2022 was basically flat. This means 330,000 coins were acquired by the market in 2022. The average daily price of bitcoin was $28,000. Assuming an acquisition price of $30,000, then $30,000 × 330,000 = $9,900,000,000. In other words, roughly 10 billion dollars of new capital flowed into the bitcoin network in 2022. By comparison, net inflows into commodity funds were -$1.3 billion and net inflows into U.S. equity funds were $11 billion in 2022, according to data published by the Investment Company Institute. You read that correctly: Bitcoin attracted as much capital as US equity funds and outpaced net flows into gold, oil, and agriculture funds combined. The implication is that investors, be they institutional or individual, should not be dismissive of this asset or its potential, despite recent

Bitcoin Whale Watching

negative events (vis-à-vis FTX, Luna, and Celsius) and economic headwinds.

Conclusion Based on stratified user growth metrics, interest in bitcoin appears to be strong and perhaps accelerating, even in an adverse market and economic environment. This runs directly counter to the belief held by some that bitcoin is becoming a disfavored asset. Given the rather dismal performance across all asset classes in 2022, one might expect a “shakeout” of weak hands and a shunning of the worst performing investments. Instead, we see the opposite. There was an acceleration of growth and a massive influx of capital by large investors, on par with that of US equity funds and exceeding that of commodity funds.

@canedigital

References Cane Island Digital Research. (2020). “There will never be more than 14 million bitcoins.” https://www.caneisland.digital/s/research-note-417.pdf Geylan, Zeynep and James Van Straten. “Research: A Review of Bitcoin Mining Company Holdings in 2022.” CryptoSlate, 19 Jan. 2023, https://cryptoslate.com/research-a-review-ofbitcoin-mining-company-holdings-in-2022/ . Peterson, Timothy. (2019). “Why Bitcoin Dominates.” SSRN, https://ssrn.com/abstract=3417334 . “Release: Combined Estimated Long-Term Flows and ETF Net Issuance.” Investment Company Institute, 1 Feb. 2023, https://www.ici.org/research/stats/combined_flows .

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Bitcoin Whale Watching

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Bitcoin Whale Watching