The Bitcoin network is transparent. Each network participant can observe in real time how many Bitcoins exist in the network and to which addresses they are being sent. Do large transfers have an impact on the price?
If a market participant sends bitcoins worth many millions of euros, this does not go unnoticed. On the contrary, transaction data and history are publicly available to all market participants. The final processing of transactions plays a special role, because Bitcoin transactions are confirmed on average “only” every ten minutes.
Before this time window expires, transfers are several minutes in a kind of waiting hall, the so-called mempool, in which initiated – but not yet processed transfers – are allocated. Since the mempool is also publicly available, the other market participants can or could use information about a transfer as a rule before it is processed.
Signs of selling pressure
In our article recently published in the journal Finance Research Letters, we analyzed how and to what extent the Bitcoin market reacts to large Bitcoin transactions on the blockchain (“on-chain”). We have defined a “large” transaction with a value of 500 or more Bitcoins – around 20 million euros. In our study, we hypothesize that the occurrence of a large Bitcoin transaction can be interpreted by the market as a sign of uncertainty. This is based on the assumption that there is basically an individual, specific motive behind every transaction, the content of which the other market participants generally have no knowledge of.
So if large amounts of bitcoins, which may have remained untouched on an address for several years, suddenly move in the context of a transaction, this could indicate the owner’s motive for wanting to sell the bitcoins. Following the principle of supply and demand, such a sale could lead to a negative price effect in the short term. Although a Bitcoin transaction does not necessarily have to lead to such a sale, we come to the assumption that the market could interpret the uncertainty associated with such a transaction as a negative price signal.
Analysis of 2,132 Bitcoin transactions
For our analysis, we extracted all 2,132 blockchain transactions with an equivalent of 500 or more Bitcoins between October 2018 and September 2019. The following graph shows the average price development of Bitcoin before and after the occurrence of large transactions on the Bitcoin blockchain.
The analysis was carried out on the basis of the Event Study methodology, in which the average return on a time window in the past is compared with the return on a window of events. If the returns in the event window are higher or lower than the historical return, one speaks of the so-called “abnormal return”, which can be explained explicitly with the occurrence of the event – in our case the large Bitcoin transaction.
Returns fall shortly after a large transfer occurs
A look at the figure shows that the Bitcoin price rises on average over all 2,132 events until shortly before the time of the event, after which it then falls up to about 5 minutes after the transaction and rises again comparatively strongly towards the end. In this way, these findings can serve as a first valid reference that provides an opportunity for a more detailed analysis.
As part of our analysis, we were able to identify significant negative price effects for the minutes close to the events and positive effects over the period from the event to 15 minutes afterwards. This leads to the conclusion that large Bitcoin transfers – as initially assumed – are treated as relevant information by the market.
Bitcoin address clustering
A differentiated view of the facts, on the other hand, suggests that the holistic view of all large Bitcoin transfers may be subject to certain limitations. In particular, the analysis can be falsified by mutually canceling effects.
Although the Bitcoin network is pseudonymous, certain information about Bitcoin addresses can be publicly identified. The deposit addresses of large crypto exchanges, which are publicly known, are mentioned as an example. Market participants can thus follow in real time how customers of the exchanges deposit or withdraw bitcoins. It can be argued that a deposit could indicate a future sale, whereas a payout speaks against a short-term sale of these bitcoins.
– Whale Alert (@whale_alert) July 15, 2021
An example is provided by this tweet, which is a post from a Twitter account that automatically tracks large transfers of cryptocurrency and – if the addresses are known – provides information about the sender and recipient.
Effects differ significantly depending on the type of transaction
In order to give our analysis greater informative value and practical relevance, the following categorization of the 2,131 transfers was carried out on the basis of their sender and recipient addresses:
- Non-exchange-related transactions (20%)
- Cold Wallet Deposits (2%)
- Cold Wallet Payouts (6%)
- Hot Wallet Deposits (27%)
- Hot Wallet Payouts (43%)
These five groups were then used again as individual samples to repeat the previous analysis. The following figure shows the cumulative abnormal returns for the five clusters together with the result for all transfers. There are significant differences between the five clusters. Non-exchange related transactions and cold wallet deposits – both before and after the actual settlement – result in negative abnormal returns, whereas cold wallet withdrawals in the 31-minute event window show more or less consistently positive abnormal returns.
For deposits on exchanges, hardly any relevant (or significant) results could be identified, whereas the picture for withdrawals was completely different. While the abnormal returns were slightly negative before the actual transfer, they shot up strongly about 9 minutes after the transfer.
Our study shows that the size and presumed motives of (large) Bitcoin transactions are part of the Bitcoin market structure. Market participants seem to be watching Bitcoin transactions and adjusting their behavior accordingly. The results of our study provide the basis for a large number of other possible investigations, which, in addition to the analysis of Bitcoin transfers, also relate to other characteristics such as the trading volume or addresses of other market participants, e.g. miners, stablecoins, ethers or non-fungible tokens (NFTs) can extend.
There are current points of contact, especially in the area of the Ethereum blockchain, where the topic of on-chain transactions has recently gained in importance and in particular the topic of the preference of transactions by miners (keyword: miner extractable value, MEV) in Context of so-called front running on decentralized exchanges such as Uniswap is currently attracting a high degree of attention.