2021-Mar-18

Asian Bitcoin Flows to North America Cool Off to 1-Year Low

East Asia has long been a key market for cryptocurrencies. In fact, blockchain analytics firm Chainalysis ranks China ahead of the United States in terms of regional adoption. This might be due to many factors, however, primarily likely due to the fact that most mining farms are indeed in the orient.

And with that status of being the mining kingpins of Bitcoin, Chinese miners have long been the key suppliers of the cryptocurrency to global markets. Using data provided from Chainalysis, we take a closer look at the regional flows between East Asia and North America.

Key Takeaways:

• Mining equipment investment cost has increased by 5900% versus 2017 for 1% of Bitcoin's Hash Power

• Mining Hash Power growth saw the lowest growth since the Genesis block increasing by only 30% from January 2020 till January 2021.

• 2020 saw the largest transfer of Bitcoins from traders into the hands of long-term investors. These coins predominantly came from Asia.

• Flows however from East Asia into North America has been trending downwards since August as the supply gets squeezed. February flows from East Asia to North America hit a one-year low.

• Flows within the East Asian markets have also seen a large drop falling to levels not seen since 2019. In contract, North American flows within the region hit an all-time-high in January 2021 with a clear upward trend.

• Monthly flows are near balance in both regions for the first time. And trading volumes are also near equal. Trading during North American hours saw the largest volumes surpassing Asian markets for the first time in 2020.

• Still, Asian markets are still responsible for the majority of Bitcoin daily price highs. And on the weekends, it would behove traders to look to Asia as the east is responsible for half of the daily trading highs when traditional markets are asleep.

The importance of East Asian market supply for Bitcoin cannot be understated. Ever since mining machines became the predominant method of earning block rewards, Bitcoin has been farmed out of China for the most part. This supply in turn continuously funded the growth of the hash power of the Bitcoin network further securing the world’s largest cryptocurrency.

However, many dynamics have come to play since March 2020. The world was witness to the largest monetary expansion ever seen in history. Bitcoin’s block reward was severed in half in May of last year. And, the cherry on top, lockdowns globally caused factories to stop production. While one might not have imagined it, the effects of this can be seen on the blockchain.

Hash power rate saw the slowest growth rate in Bitcoin’s history last year as new mining equipment was quickly sold out with not new production in sight (see chart 1). This means that for mining farms to gain any further advantage in solving the block for the reward has become much more challenging. The implications of this means that miners now are more likely to hold onto their Bitcoin until it makes financially viable sense to sell it for equipment when production begins rolling out again.

Back of the envelope calculations show that 1% of the networks hash power would require an investment to the tune of $90mn once Bitmain rolls out its latest flagship model, the Antminer S19j with current pricing of $5000 per unit. At the start of 2017 this 1% would have only cost $1.5mn.

1: Bitcoin Hash Power Growth Fell to Lowest Level Since Genesis in 2020

North American long-term investors had nowhere else but to look to the East Asian markets. And as far as value in USD, markets saw the largest exchange of value in 2020. 2021 has been just the same. Net flows from East Asia going to North American markets was to the astounding tune of $14bn. Even more amazing, is that with the rapid price of Bitcoin in 2021, $7bn worth of Bitcoin has been moved between the two regions up until mid-March 2021.

But in terms of actual Bitcoin, the supply that’s being sold has dropped precipitously despite the $50k+ price tag (see chart 2). March is on track to see the lowest transfer of Bitcoin between the two regions since February 2020 - before markets crashed.

This could be an indication of two possibilities. Miners expect the price of mining equipment (and hence - competition) to increase and are holding on to their Bitcoin that will in turn result in a supply squeeze pushing prices further up. The other possibility is that market demand from North America is dropping.

Given the fact that the downtrend started since Bitcoin bull run, it's likely to be the former possibility potentially spurring on the next exponential rise in the cryptocurrency's price.

2: Net Bitcoin Flows From and To East Asia (On-Chain Activity within Region)

Further making the case for Bitcoin as a long-term investment asset is who is actually holding the cryptocurrency. Chainalysis data points to a very clear trend mid July 2019 indicating that Bitcoin has exchanged hands from traders to long-term investors in grand scale (see chart 3).

The supply has for the most part been coming out of Asia (see chart 4). Since July 2019, Flows between East Asia and North America was trending upwards. Whats most important to this narrative of demand is the all-time-high spike seen in March 2020 when Bitcoin crashed below the $5k mark.

And even after Bitcoin's halvening period kicked in, East Asian markets continued to supply North America. However a supply squeeze can be seen and is likely to be the fundamental reason why Bitcoin's price continued to climb with little hiccup.

Noteworthy is the fact that flows within North America increased dramatically and continue to do so (see chart 6).

3: Bitcoin Cumulative Holdings Shifting from Traders to Long-Term Investors (Holding Bitcoin for Over 3 Months)

4: Bitcoin Flows from East Asia to North America

5: Bitcoin Flows within East Asia

6: Bitcoin Flows within North America

The data introduce new realities of supply flows within regions. Most flows land on local exchanges. With flow levels now equal, ZUBR takes a look at the distribution of trading volumes across markets (see table). The bull run since 2019 (sans Black Thursday 2020) shows that trading distribution based on market opening hours is nearly evenly balanced year on year. In 2020, trading for Bitcoin - across all exchanges - shows to have taken over Asia for the first time accounting for over 30% of all volume.

Bitcoin: Daily % Change from Open-to-High and from Open-to-Low

wdt_ID Year Asia USA EU Closed Weekend

7: Setting New Highs

8: Setting New Highs During Weekends

Asian markets however remain a key mover of Bitcoin's price despite the media's laser focus on Western markets. Trading happening during East Asia traditional market hours (from Japan to Singapore) appear to be responsible for 26% of Bitcoin's daily high price. So far in 2021, the gap between Asia and US for new daily highs has closed (see chart 7).

However, it must be noted that while institutions are now trading Bitcoin - especially through CME, Bakkt and GBTC, weekend exposure to the cryptocurrency is fairly essential. Asian markets push new highs during the weekends 50% of the time (see chart 8).

These are the components that at the time of writing can be seen with the data in this report:

  • Increase in demand from North American markets.
  • Decrease in supply flows moving from East Asia to North America.
  • Increase in long-term holding. Decrease in Bitcoin's available for trading.
  • Increase in investment cost for miners resulting in holding Bitcoin for very attractive price.

Ultimately, the fundamentals of a serious supply squeeze and value of Bitcoin seems to have sound financial validity in moving in an upward direction.

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