The Week On-chain (Week 8, 2021)

Bitcoin hits new all time highs alongside news of MicroStrategy completing yet another convertible note issuance for a total of $1.05 Billion.

The Week On-chain (Week 8, 2021)

Bitcoin Market Overview

Bitcoin has continued it's trend of new all time highs which is almost becoming a daily occurrence in 2021. The market opened up the week with an intra-day low of $46,347 before rallying to an all time high of $58,330 on Sunday.

A fundamental factor driving continued market strength is likely news of MicroStrategy completing yet another convertible note issuance for a total of $1.05 Billion. These funds are to be used for the explicit purpose of acquiring additional BTC for the company balance sheet. Without question, corporate balance sheet acquisition of BTC has been the trend for 2020-21 and MicroStrategy is at the tip of the spear.

Larger Wallets Shuffling Supply

As price continues to appreciate, there are some signs of shifts occurring in the larger wallets (100+ BTC) that may provide some insight into underlying market dynamics. It is key to understand the holistic picture before making an assumption as to whether these coins are buying, selling or holding and on-chain data is well placed to provide this insight.

Wallets with 1k to 10k BTC holdings in particular have been in a strong uptrend since March 2020, having increased by 14.18% between 12-Mar-20 and 5-Feb-21. This has been referred to as 'Bitcoin whale spawning season' as these addresses represent holdings of millions to hundreds of millions of dollars (considering price rallying from $3.8k to $58k in that time).

However over the last two weeks, this wallet class appears to be 'reducing holdings'. Is this new sell pressure? Are institutions getting spooked or taking profits? A few interesting occurrences on-chain are presented in the points, table and charts below to help answer this question.

  • Octopus to Fish (10 to 100 BTC, red) have been in a persistent down-trend since November 2020 declining by around -128k BTC. This trend is largely uninterrupted.
  • Dolphin to Shark (100 to 1k BTC, purple) have been gradually accumulating through 2020, with a notable decline of around -95k BTC in January 2021. In February however, these wallets have seen a growth of +117k BTC to new local highs.
  • Whale to Humpback (1k to 10k BTC, green) have similarly been in accumulation throughout 2020. However, 2021 has been almost perfect inverse to the Dolphin/Shark class. Whales saw a supply increase in January of around +80k BTC and a subsequent decrease in supply of -140k BTC in February.

Important to note is how the supply changes for the Dolphin/Shark class (purple) and Whale/Humpback class (green) are mirrored in volume and shape. Where one class sees increasing volume, the other sees decreasing volume (and vice-versa). Large vertical changes in charts like this are often characteristic of a few large entities (e.g. exchanges, whales or miners) making internal transactions.

This wallet behaviour suggests a sizeable portion of these coins may not be sold, but instead being restructured in custodial wallets. There was a preference for 1k to 10k wallets in January (acquisition withdrawals perhaps) that are now transitioning into larger sets of UTXOs with smaller denominations between 100 and 1k. Perhaps coins are being placed into multi-signature schemes or custodians are undertaking internal shuffling to meet client requirements.

We can add additional weight to this thesis by observing the balance held by accumulation addresses that remains in a consistent up-trend. Accumulation wallets are those displaying long term HODLer heuristics with at least two incoming transfers and no spends (the metric ignores exchanges, miners and ancient coins > 7yrs).

In fact, once could hazard a guess that this behaviour is indicative of very long term custodial holdings and coins are entering deep cold storage. So whilst coins are on the move and larger balances are being reclassified, it does not necessarily suggest an end to whale spawning season (and may in fact suggest the opposite!).

Ethereum Feature: Mining Revenues

It is no secret that Ethereum fees have been on the rise. Ultimately, this can be considered a vote of confidence that users are willing to pay a premium for inclusion in a block. Users will pay a high fee so long as the value of the transaction is outcome is profitable relative to the fee paid.

Impressively, Ethereum transaction fees have managed to sustain over 50% share of the total block reward on two major occasions, during 'DeFi summer' between August and October 2020, and throughout most of 2021.

A 50% fee revenue means that transaction fees are currently equal to the available block subsidy making mining on Ethereum significantly more profitable. Current mining revenues are fluctuating around 25k to 30k ETH per day (purple) which creates an incentive for miners to bring more hash-power (orange) onto the network to create a secure barrier of energy and hardware. On the 19-Feb, Ethereum hash-rate hit a new all time high of 431.7 TH/s, almost 60% higher than the previous market cycle peak of 292.1TH/s in July 2018.

Whilst high fees and congestion can be challenging for Ethereum users, it does signify greatly enhanced protocol security and product market fit. This demonstrates a demand case for decentralised finance applications which are driving much of the demand for block-space. The challenge of congestion and fee pressure will also act as motivation to expand focus and efforts of scalability technology to improve user experience.

Weekly Feature: Grayscale Dashboards

Glassnode has recently implemented metrics to track Grayscale inflows and balances for both Bitcoin and Ethereum. This institutional supply sink continues to absorb coins from the market and over the past week, Grayscale products have taken in a total supply of 1,640 BTC (~$95M) and 27,480 ETH (~$53M).

The GBTC product has continued to trade at a premium between +8.5% and +12.2% this week suggesting continued institutional interest. Where a premium is present for Grayscale products, an arbitrage trade opportunity exists for in-kind transfers of BTC into the trust creating a persistent supply sink. A similar premium is present for the GETH product this week trading between +5.1% and +11.2% compared to net asset value.

A preset Grayscale dashboard is available to inspect asset flows, balances under management and price premiums. Be sure to check out Glassnode dashboards to use the preset dashboards, or to build your own custom suite of metrics to track this evolving market.

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Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.