What blockchain analysis tells us about Bitcoin

In this piece, CoinDesk contributor Tim Swanson looks at the latest blockchain data in an attempt to draw new conclusions about how bitcoins are spent, why they are held, and what this could mean for the emerging market.

John Ratcliff is a principal engineer at NVIDIA who has a unique hobby, using 3-D tools to visualize blockchain analytics. Over the past few months, he has created visual aids for the community, in part to show trends and highlight uncertainty.

For example, below is a pie chart of UTXO (unspent transaction outputs), better known as bitcoins, and their distribution by age. That is, the amount of bitcoins based on their last use.

The following chart is an updated version based on the bitcoin blockchain as of April 30.

As you can see, the oldest coins still didn’t budge or move in the months that followed, for reasons described in a recent paper (pdf).

The most surprising area of ​​growth is the three-to-six month segment.

While there could be a variety of reasons why this is now the largest segment (eg lost, stolen tokens, Goxcoins), the timing coincides with the November price bubble that peaked at $1100 per bitcoin – it has since down about $450.

That is, these holders could and probably bought during the peak and are simply underwater. If this is the case, rather than cashing out and realizing a loss, they hold onto it and wait (hoping) for another rise in prices.

Some readers may think that two data points are not enough to draw a conclusion. For example, what does the blockchain distribution look like in the last year?

After exchanging some thoughts and theories with Ratcliff, he put together a very interesting animation of the daily changes in distribution based on age from the genesis block on January 3, 2009 to May 14 (here is the raw data). Spoiler alert: not much happens the first year.

At the beginning of January 2014, the three-to-six-month segment represented only 6.8% of all tokens.

Now it represents over 3 million UTXOs in part because people probably don’t want to download because of the ongoing bear market.

However, the activity generally associated with trading occurs only on the left side of the bar graph, in the period of a week or less, which represents about 10% of all mined bitcoins. But as it relates to day traders, gambling sites (eg Satoshi Dice, Prime Dice), remittances or other activities that cannot be determined by this method.

In Ratcliff’s view, “we know what and where the liquid bitcoins are. And what’s interesting about the chart is that it shows the difference in liquidity at different time periods”.

He is currently working on releasing a number of other ways to visualize this type of data starting with the genesis block (ie showing every token at every address in 3-D). In addition, he has another shorter track from March 9, 2013 to May 12, 2014.

Still, he says that you cannot definitively jump to conclusions from it.

For example, if Bob moves 100,000 bitcoins, outside observers don’t know what Bob did (moving a wallet like Bitstamp did in November, doing real trading, betting, etc.).

In Ratcliff’s view, his approach has one key difference, if Bob has a bitcoin address and he spends one bitcoin (UTXO), observers will see that event as if Bob only moved one bitcoin – Ratcliff marks age as age of last spend transaction.

This then proves that Bob still controls this address (an address that represents inputs and outputs) – this address is not dead which is a subtle distinction.

What you can see for him is X% of bitcoins that are liquid (move on a weekly basis), X% that are “saved” and X% (or in this case, 30%) that may be gone forever. It is unclear whether someone like Satoshi Nakamoto (who reportedly controls around 1 million bitcoins) still controls the keys or how much market uncertainty this will create.

For additional analysis, I contacted Jonathan Levin, co-founder of Coinometrics for his insights on this tool and approach. He explains:

I am interested in the one month and one week decrease as well. It appears that fewer bitcoins are being moved around the blockchain now than in January. We’ve also seen volumes on the exchanges fall from December levels, which may explain some of this decline.”

This photo also made the rounds on social media and on CoinDesk:

The original source is a Technology Review infographic.

Yet the data source Sarah Meiklejohn, author of one of the best articles in this space, calls “A Fistful of Bitcoins” (pdf). I contacted her and she said that the relevant data comes from Figure 3 in the same paper.

However, the likely explanation for the infographic is that mining pools and farms usually have to sell their bitcoins to cover their operating costs, making it difficult to isolate actual trading from mining activity.

What the graphic probably visualizes is the competitiveness and professionalization of the industry.

Virtually all miners must spend their tokens within a month of mining them. This is not real economic activity for the ecosystem, since almost all of those funds are converted to a foreign currency (fiat currency) and then paid to a utility or hardware company, it does not improve the protocol or its usability .

Another depiction of the network activity are these two charts:

The graph above is the chain transaction volume over the past year, excluding the top 100 popular addresses (such as gambling sites).

Basically, the older and bigger the amount, the bigger the leverage point (as statisticians call it). What these two charts show is that there is very little new movement in the chain.

One of the reasons this is worth mentioning is because at the beginning of 2014 there were an estimated 20,000 – 30,000 merchants accepting bitcoins for payment. By the end of the first quarter, approximately 60,000 merchants accepted bitcoins. Yet there has been very little corresponding growth in the chain.

Instead, most of the growth is on the edges, in trust-me silos. The occasional spikes are outliers involving exchanges that move wallets from one wallet to another (as Bitstamp did and Mt. Gox allegedly did).

About BDD, Jonathan Levin said:

Blockchain analysis and forensics is a nascent yet exciting field of study that will reveal what kind of real-world activity occurs on public ledgers. And trailblazers like John Ratcliff, Jonathan Levin and Sarah Meiklejohn are individuals to keep your eye on.