Bitcoin Investors and Speculators Hold Their Positions over the Summer

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Earlier this year, we shared insights from our analysis of the bitcoin money supply, which revealed long-term investors sold approximately $24 billion¹ of bitcoin to new speculators between December 2017 and April 2018, with half of this activity occurring in December alone. This unprecedented injection of liquidity served as a fundamental driver behind the price decline during the same period.

Today, we’re excited to provide freshly updated data (through August 2018) and discuss our central takeaway: that bitcoin investors and speculators have held their positions over the summer. Before we review the key findings, let’s briefly cover how we map the monetary aggregates and why we believe it’s valuable to maintain this unique data set.

What we are doing: combining our dataset of blockchain activity with money supply analysis

Chainalysis clusters² the bitcoin blockchain based on patterns and a variety of heuristics.  Through these clusters, we can understand types of users, which allows us to define the money supply according to monetary aggregates. The concept of standardized monetary aggregates has its roots in traditional economics. The Federal Reserve, for example, tracks various measures of U.S. dollar money supply and their relationships with important economic variables, including GDP growth and inflation.

With bitcoin, we can categorize coins from the most liquid (speculative coins and those used by services for transactions), to less liquid bitcoin (coins held for investment, including by long-term HODLers and new investors), and the least liquid (coins that are lost or yet to be mined). More specifically, we can categorize the money supply into monetary aggregates known as M0, the most liquid category, through M3, the least liquid. Our most recent mapping of these monetary aggregates to bitcoin is shown below.

Why we do it: to build a better understanding of the crypto-economy

For emerging financial systems, such as the crypto-economy, building an understanding of the underlying economic signals is a key factor in empowering participants to make more informed decisions. People are simply less likely to stay in, and are less well served by, a market that appears random and based on hype. If we can identify and monitor clear signals —and those signals are logical— more people will feel comfortable investing. That’s where data can play an important role.

At Chainalysis, our unique data sets allow us to develop a nuanced understanding of different types of investors. Rather than guessing the nature of anonymous addresses, we can analyze bitcoin across multiple categories, including “speculators” and “investors.” We can also  estimate the amount of  lost coins.

Key findings from our updated data
When we reviewed our initial data —which was exclusively reported in the Financial Times— we saw major changes to the defined monetary aggregates: Over the December 2017 to April 2018 period, new speculators (M0) flooded the market, while long-term investors (M2) liquidated at higher valuations.

Our updated data covers a few more months, through August 2018, and reveals marked stability in each of the monetary aggregates. As shown below, all the monetary aggregates have been extremely steady over the summer months. Specifically, the amount of bitcoin held for speculation (M0) has remained stable between May and August at around 22% of available bitcoin. Similarly, the amount of bitcoin held for investment remained stable during the summer at around 30%.


In our view, this is a sign of a market less sensitive to hype, where each news item does not have the ability to significantly push bitcoin prices up or down. Instead, the market seems to have recalibrated after the entry of so many new market participants with different beliefs and expectations than those who held bitcoin prior to 2017.

Neither long-term investors nor new speculators have changed their positions much this summer. This suggests that the market will make a major move, for better or worse, only in response to a fundamental change. For example, restrictive regulation, new use cases, or technology improvements —such as the lightning network— could act as catalysts of change. Regardless, the continued presence of both long-term investors and new speculators suggests that bitcoin has maintained the growth in its user base from year-end 2017. As such, the first challenge of adoption —getting cryptocurrency into people’s hands— has been overcome, but we are now waiting to see what the next stage of adoption looks like.

For more research-driven insights, check out our report on Tether and our recent take on global regulatory compliance and anti-money laundering in the cryptocurrency world.

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1) In our June report, we found that long-term investors sold ~$30 billion of bitcoin. As we learn more about transactions on the blockchain, our accuracy improves. In this case, people we identified as speculators now look, given more time to observe them, like new long-term investors.

2) At Chainalysis, our fundamental unit of the crypto economy is the cluster. A cluster is our best estimation of the addresses included in a single entity's wallet. We create clusters by analyzing the blockchain data of a cryptocurrency using a set of rules that take into consideration properties such as spending patterns, address relationships, and transaction structure (to name a few).

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Monitor transactions across the token’s full lifecycle, from issuance to redemption—and any transaction in between.

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How Transaction Monitoring Works at Chainalysis

One of the reasons Chainalysis KYT is so popular is that it uses global anti-money laundering (AML) standards common across regulatory bodies. We apply these standards when each transaction is screened.

Cryptocurrency businesses also need to understand the aggregate risk profile of each of their users. That’s why Chainalysis KYT provides a view of risk profiles at the user level, which reflects all of a user’s screened transactions. For example, if an organization has a user who receives funds from a darknet market, our software automatically flags that transaction as high risk. If the user sends funds to a regulated exchange, our software marks that transaction as low risk. And so on. Every screened transaction feeds into a user’s risk profile. Chainalysis KYT displays all user profiles, sortable by high, medium or low risk (using traffic light colors) for easy scanning.

We apply our risk methodology in real time to all users within an organization’s user base. This saves compliance teams from laborious, manual screening work. They can instead focus on developing comprehensive compliance programs. Organizations that work with us tell us this has enabled them to meet regulatory expectations and launch or grow their businesses.

Customizable risk level

We’re now giving our customers the ability to adjust the risk level of a category or a service. For example, not all jurisdictions around the world treat gambling the same way. In some countries, gambling is not considered a legitimate business activity and thus online gambling sites would be treated as high risk. In other countries, gambling is not considered illicit, which means properly licensed online gambling sites would be treated as low risk.

The ability to customize the risk level of categories and specific services means our customers can automate even more of their compliance workflows.

Organization-wide dashboard

One of the most useful facets of Chainalysis KYT is having a view of all users and their risk profiles directly accessible upon first logging in. It provides a visual alert of which users have high risk profiles and therefore require the most immediate attention. In keeping with the spirit of simplified visual cues, we have now launched a dashboard that summarizes key indicators at the total organization level. For example, organizations can now see what percentage of their user base is falling under high, medium or low risk. They will soon be able to see things like total exposure by category, or total transaction volume per day. These and other metrics will provide our customers additional understanding of their organization’s total exposure trends over time.

In-app chat

At Chainalysis, we strive to provide as much support to our customers as we can. To make it easier to interact with us, we added in-app chat to Chainalysis KYT. This allows our customers to send us questions or feedback without having to leave the environment. Our team typically responds within minutes.

Looking ahead

We know software is most valuable when it makes the lives of our customers easier and more productive. This means we’ll continue to add intuitive capabilities to our compliance products while increasing versatility for ongoing transaction monitoring. In the coming months, we will improve how transaction information is displayed. We will also boost our monitoring capabilities for other cryptocurrencies beyond Bitcoin. And we will deepen the integration with Chainalysis Reactor, which is used for enhanced due diligence and investigations.

The momentum around cryptocurrency compliance is only just starting and we look forward to continuing to offer software that builds trust in blockchains.

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