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A Big Look at Bitcoin w/ Philip Gradwell of Chainalysis


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Slides from Flippening Podcast Episode #79 with Philip Gradwell of Chainalysis

This deck covers:
• Philip’s career before Chainalysis
• His role as Chief Economist at Chainalysis
• How a relatively small group of traders influence Bitcoin’s price
• The percentage of Bitcoin that could be lost forever
• How most Bitcoin (80%) is HODLed long-term
• What is a VASP or virtual asset service provider?
• How Chainalysis ties addresses to particular exchanges
• How law enforcement uses blockchain analytics
• How illicit activity accounts for just 1% of BTC transaction volume
• Bitcoin’s concentration among the top 14 crypto exchanges
• Analyzing blockchains that follow different accounting models
• The role of fiat in the crypto ecosystem
• How Tether became the dominant quote currency in crypto trading
• Using on-chain data to verify reported trading volumes
• Making blockchain analytics intelligible for the next wave of crypto adopters

Published in: Economy & Finance
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A Big Look at Bitcoin w/ Philip Gradwell of Chainalysis

  1. 1. A big look at bitcoin Philip Gradwell, Chief Economist For the Flippening podcast
  2. 2. Proprietary and Confidential 2 ● Introduction ● How bitcoin is used ● The scale and nature of illicit activity ● Understanding exchanges ● Flows of bitcoin by region ● Key takeaways and questions Agenda
  3. 3. Proprietary and Confidential Introduction 3
  4. 4. Proprietary and Confidential 250+ customers across 40 countries 4 Law Enforcement & Regulators Cryptocurrency Businesses Financial Institutions
  5. 5. Proprietary and Confidential Chainalysis maps addresses to services 5 What you see on the blockchain What you see in Chainalysis Coinify Bitstamp Services can have thousands to tens of millions of addresses
  6. 6. Proprietary and Confidential Context: the bitcoin price entered a ‘winter’ in 2018 until Q2 2019, since then it averaged ~$8,700 6
  7. 7. Proprietary and Confidential 7 How bitcoin is used
  8. 8. Proprietary and Confidential 8 Three questions to understand how bitcoin is used 8 How is it held? How much flows and why? How many people are involved?
  9. 9. Proprietary and Confidential 62% of mined bitcoin is held for investment, 20% is likely lost, 18% supplies trading activity 9 Lost 3.7m BTC Trading 3.4m BTC Investment 11.4m BTC To be mined 2.4m BTC
  10. 10. Proprietary and Confidential 54% of bitcoin has currently been held for more than a year 10
  11. 11. Proprietary and Confidential 82% of bitcoin is currently held by entities that retain more than ¾ of the bitcoin they receive 11
  12. 12. Proprietary and Confidential 12 60% of available bitcoin is currently held by Virtual Asset Service Providers (VASPs)
  13. 13. Proprietary and Confidential Of the 40% of available bitcoin not held by VASPs, 87% has passed through VASPs 13
  14. 14. Proprietary and Confidential $14.4 billion of bitcoin has been transferred per week on average in 2020 14
  15. 15. Proprietary and Confidential 40% of bitcoin flows between exchanges, with 43% between unknowns often in transit to exchanges 15
  16. 16. Proprietary and Confidential Holding on-chain Millions Holding on exchange websites Tens of millions Holding via ETPs/Trusts Unknown but maybe tens of thousands Owners of bitcoin are harder to count due to pseudo-anonymous on-chain addresses and omnibus accounts on exchanges Weekly active users How many bitcoin users are there? 16 Active on-chain Max 310,000 per week (2020 average) Active on-chain on exchanges Max 340,000 per week (2020 average) Active on exchange websites ~5 million per week (SimilarWeb unique visitors) Active users transfer or trade bitcoin in a week, so are easier to count, but on-chain estimates are upper bounds Owners
  17. 17. Proprietary and Confidential Summary 17 ⅗ of bitcoin is held for investment by tens of millions of people, mostly for years, almost always sourced from VASPs The vast majority of people hold the majority of investment bitcoin on VASPs, but a large minority of investment bitcoin are held independently on-chain by low millions of people Ownership is concentrated and the largest independent holders are likely a mix of early adopters, high net worth individuals, and trading companies ⅕ of bitcoin is regularly moved, mostly between exchanges, creating a flow of ~$14 billion per week. Low hundreds of thousands of people actively transfer bitcoin each week ⅕ of bitcoin is likely lost
  18. 18. Proprietary and Confidential Illicit activity 18
  19. 19. Proprietary and Confidential 19 Illicit cryptocurrency activity reached an all time high in 2019 1.1% of transaction volume > 180% increase 2018 - 2019 > $11.5 billion sent & received
  20. 20. Proprietary and Confidential Scams aside, illicit and merchant services are similarly sized 20 Increase due to bitcoin sent to Ponzi schemes e.g. PlusToken (but not OneCoin!)
  21. 21. Proprietary and Confidential Exchanges increasingly off-ramp illicit activity 21
  22. 22. Proprietary and Confidential Summary 22 Illicit activity reached an all time high in 2019, largely due to scams Illicit activity is ~1% of value transferred on-chain Scams aside, illicit activity is similar in size to merchant services Illicit funds are increasingly laundered through a small number of exchanges, often via rouge OTC brokers
  23. 23. Proprietary and Confidential Exchanges 23
  24. 24. Proprietary and Confidential Which exchanges are most important? Are participants retail or professional? How does trading and on-chain activity interact? Three questions to understand exchanges 2424
  25. 25. Proprietary and Confidential Four exchanges received 40% of bitcoin received by exchanges in 2020, the next 10 received 36% 25
  26. 26. Proprietary and Confidential 42% of exchange flows are between, and 32% is to/from, crypto-to-fiat exchanges 26
  27. 27. Proprietary and Confidential 895k bitcoin has moved from crypto-to-crypto exchanges to crypto-to-fiat exchanges since 2018 27
  28. 28. Proprietary and Confidential Retail participation is high, with ¾ million transfers of less than $1k received by exchanges per week 28
  29. 29. Proprietary and Confidential Professionals control liquidity, with 85% of USD value into exchanges from transfers of $10k+ 29
  30. 30. Proprietary and Confidential Some exchanges trade a bitcoin received on-chain many more times than others 30
  31. 31. Proprietary and Confidential Changes in trade intensity can identify when an exchange business model changes 31 Poloniex acquired
  32. 32. Proprietary and Confidential Summary 32 Exchanges are the main origin and destination of bitcoin flows Bitcoin flows to exchanges are concentrated, with the top four exchanges receiving 40%, and the top 14 receiving 75%, since 2018 Crypto-to-fiat exchanges are the core of the industry. ¾ of bitcoin flows between exchanges are between, to, or from crypto-to-fiat exchanges since 2018. Since mid-2018 there has been a large net flow of bitcoin from crypto-to-crypto to crypto-to-fiat exchanges, totalling 895k bitcoin to date The vast majority of the retail market remains on exchanges’ websites, rarely interacting with the blockchain. Yet, there is significant retail on-chain interaction with exchanges, with ¾ million transfers of less than $1k received by exchanges per week. However, professionals control liquidity, moving 85% of the USD value into exchanges in transfers of more than $10k The ratio between trading volumes and on-chain inflows to exchanges gives insight into otherwise inscrutable business models
  33. 33. Proprietary and Confidential Flows of bitcoin by region 33
  34. 34. Proprietary and Confidential 58% of bitcoin flows occur within regions, mostly within Eastern Asia and North America 34
  35. 35. Proprietary and Confidential 42% of bitcoin flows are between regions, mostly between Eastern Asia and North America 35
  36. 36. Proprietary and Confidential Western Europe is a conduit for flows, receiving from N America and sending to RoW and E Asia 36
  37. 37. Proprietary and Confidential Summary 37 Geographic analysis of bitcoin flows is possible with advanced analytics. It focuses on understanding the location of the majority of a service’s customers, based on multiple data points from timezone analysis, to web traffic, and so on The majority of flows occur within regions, suggesting strong local markets, particularly in Eastern Asia and North America However flows between regions are a large minority of flows, suggesting bitcoin markets are interconnected Western Europe has larger flows to other regions than it has within the region. Since 2018 it is a net receiver from North America and a net sender to Eastern Asia and RoW
  38. 38. Proprietary and Confidential Key takeaways 38
  39. 39. Proprietary and Confidential 39 Summary ⅗ of bitcoin is held for investment by tens of millions of people; the majority is held on VASPs, and ownership is concentrated Trading is the next largest use case, involving ⅕ of bitcoin and responsible for most of the on-chain flow of ~$14 billion per week Crypto-to-fiat exchanges are the core of the industry, with a retail market of millions of people, but liquidity is controlled by professionals Illicit activity is ~1% of value transferred on-chain, scams are the most lucrative Bitcoin activity is mainly regional, mainly within Eastern Asia and North America, but inter-regional flows are a large minority of flows Flows between Western Europe and other regions are larger than flows within Western Europe
  40. 40. Proprietary and Confidential Thank you! Questions? 4040