What did bitcoin movements look like in 2015?

[Note: opinions expressed below are solely my own and do not represent the views of my employer or any company I advise.]

Last April, May and August I wrote three posts that attempted to look at the flow of funds: where bitcoins move to throughout the ecosystem.

Thanks to the team at Chainalysis we can now have a more granular view into specific  transfer corridors and movements (not necessarily holdings) between miners, exchanges, darknet markets, payment processors and coin mixers.

The first three charts are backwards looking.

Bitcoin PieAbove is a simplified, color coded version of a tool that Chainalysis provides to its customers such as compliance teams at exchanges.  The thickness of a band accurately represents the volume of that corridor, it is drawn to scale.

What is the method used to generate the plot?

The chord-plot shows all bitcoin transactions in 2015 traced down all the way back to a known entity. This means that the connection between the entities can be any number of hops away.

So for instance, for the exchanges it will include direct arbitrage, but also the modus operandi for bitcoin: individuals buying bitcoins at an exchange and then doing peer-to-peer transfers.  Again this can be any number of hops and then perhaps later end at an exchange again where someone is cashing out.

According to Chainalysis, by hiding all the intermediate steps we can begin to learn how most of the Bitcoin ecosystem is put together (e.g., can it be split into sub systems?, is there a dark and a lit economy?, and what is bitcoin actually used for?).


  • Blue: virtual currency exchanges
  • Red: darknet markets
  • Pink: coin mixers
  • Green: mining pools
  • Yellow: payment processors

Altogether there are 14 major exchanges tracked in blue including (in alphabetical order): Bitfinex, Bitreserve (now Uphold), Bitstamp, BitVC (subsidiary of Huobi), BTCC (formerly BTC China), BTC-e, Circle, Coinbase (most), Huobi, itBit, Kraken, LocalBitcoins, OKCoin and Xapo.

The identity of 12 exchanges were removed with the exception of BTC-e and LocalBitcoins.

  • BTC-e was founded in July 2011 and is one of the oldest operating exchanges still around.  It does not require users to provide KYC documentation nor has it implemented AML processes.  This has made it an attractive exchange for those wanting to remain anonymous.
  • LocalBitcoins was founded in June 2012 and is a combination of Craigslist and Uber for bitcoin transfers.  It enables users to post trade requests on its site and provides escrow and reputation services for the facilitation of those trades.  Like BTC-e, it does not require users to provide KYC documentation nor has it implemented AML processes.  As a result it is a popular service for those wanting to trade bitcoins anonymously.

sharedcoinSharedCoin (depicted in pink above) is a product / service from Blockchain.info that allows users to mix their coins together with other users.  It is one of about a dozen services that attempt to — depending who you talk to — delink the history or provenance of a bitcoin.

agoraFounded in the spring of 2013, Agora (depicted in red above) was the largest known darknet market operating in 2015.

Forward Tracing

For each of the entities labeled on the charts below there is a ‘send to self’ characteristic which in fact are the UTXOs that originate from that entity and ends in unspent funds without first hitting another service.  So it can be both cold storage owned by the service or someone hoarding (“hodling”) coins using that service.

Interestingly enough, the deposits held at one VC-backed intermediary almost all stay cold.

forward looking localbitcoinsAbove is LocalBitcoins.

forward looking btceAbove is BTC-e.

forward looking sharedcoinAbove is SharedCoin.

Questions and Answers

I also spoke with the Chainalysis team about how their clustering algorithm worked.

Q: What about all the transactions that did not go between central parties and intermediaries?  For instance, if I used my wallet and sent you some bitcoins to your wallet, how much is that in terms of total activity?

A: The analysis above is intended to isolate sub-economies, not to see who is directly trading with who. The Chainalysis team previously did a Chord of that roughly a year ago which shows the all-time history (so early days will be overrepresented) and it was based only on one hop away transactions and normalized to what the team can ascribe to a known service.

The new chord above is different as it continues searching backwards until it locates an identified entity – this means it could have passed through an other either unidentified or less perfectly described service – but as it is same for everything and we have the law of large numbers it will still give a pretty accurate picture of what subeconomies exist.  It was made to identify if the Bitcoin network had a dark economy and a lit economy (e.g. if the same coins were moving in circles e.g. dark-market->btc-e->localbitcoin->dark-market and what amount of that loop would include the regulated markets too).

So, for example, the transfers going between the regulated exchanges, many will be multihop transfers, but they start and end in regulated exchanges and as such could be described as being part of the lit economy.

Q: What specific exchange activity can you actually identify?

A: It varies per service but Chainalysis (and others) have access to some “full wallets” from clients.  Also newer deposits are often not known so the balance in a wallet will be underestimated due to how the current algorithms work.

Further, some services require special attention and special analytics to be well represented due to their way of transacting – this includes some of the regional dark markets and Coinbase (due to how the company splits and pools deposits, see below).  By looking at all the known entities and how many addresses they contain as a percentage of all addresses ever used for bitcoin in all time, Chainalysis has significant coverage and these are responsible for more than half of all transactions ever happened.

Q: And what was the motivation behind building this?

A: The initial purpose of the plot was to identify subsystems and pain points in the ecosystem – the team was at first uncertain of the possibility that every Bitcoin user simply bought bitcoins from exchanges to buy drugs but that does not seem to be the case.  Most drug buyers use LocalBitcoins and sellers cash-in via mixers on LocalBitcoins or BTC-e (for the larger amounts).

Q: How large is SharedCoin and other mixers?

A: SharedCoin is currently around 8 million addresses and Bitcoin Fog is 200,000 addresses; they are the two largest.1

Additional analysis

Based on the charts above, what observations can be seen?

  • With a forward tracing graph we can see where all the unspent bitcoins come from (or are stored).  One observation is that intermediaries, in this case exchanges, are holding on to large quantities of deposits.  That is to say that many users (likely traders) — despite the quantifiable known risks of trusting exchanges — still prefer to store bitcoins on virtual currency exchanges.  Or to look at it another way: exchanges end up with many stagnant bitcoins and what this likely means is that users are buying lots of bitcoins from that exchange and not moving them and/or the exchange itself is holding a lot of bitcoins (perhaps collected via transaction fees or forfeited accounts).2

  • A lot of the activity between exchanges (as depicted in blue lines) is probably based on arbitrage.  Arbitrage means if Exchange A is selling bitcoins for a higher price than Exchange B, Alice will buy bitcoins on Exchange B and transfer them to Exchange A where they are sold for a profit.
  • Despite the amount of purported wash trading and internal bot trading that several Chinese exchanges are believed to operate, there is still a lot of on-chain flows into and out of Chinese-based exchanges, most likely due to arbitrage.
  • An unknown amount of users are using bitcoin for peer-to-peer transactions.  This may sound like a truism (after all, that’s what the whitepaper pitches in its title), but what this looks like above is that people go to exchanges to transfer fiat currencies for virtual currencies.  Then users, using the P2P mechanic of bitcoin (or other virtual currencies), transfer their coins to someone else.  We can see this by counting hops between the exchanges.

A potential caveat

Because of how certain architectures obfuscate transactions — such as Coinbase and others — it can be difficult for accurate external data analysis.  However with their latest clustering algorithm, Chainalysis’s coverage of Coinbase now extends to roughly the same size of the size of Mt. Gox at its height.3

Why can this be a challenge?  Coinbase’s current design can make it difficult for many data analytics efforts to clearly distinguish bitcoins moving between addresses.  For instance, when Bob deposits bitcoins into one Coinbase address he can withdraw the deposit from that same address up to a limit.  After about two bitcoins are withdrawn, Bob then automatically begins to draw out of a central depository pool making it harder to look at the flow granularly.

Other secondary information also makes it unclear how much activity takes place internally.  For instance, in a recent interview with Wired magazine, Coinbase provided the following information:

According to Coinbase, the Silicon Valley startup that operates digital bitcoin wallets for over 2.8 million people across the globe, about 20 percent of the transactions on its network involve payments or other tasks where bitcoin is used as a currency. The other 80 percent of those transactions are mere speculation, where bitcoin is traded as a commodity in search of a profit.

In a subsequent interview with New York Business Journal, Coinbase stated that it “has served 2.9 million people with $3 billion worth of bitcoin transactions.”

It is unclear at this time if all of those transactions are just an aggregation of trades taking place via the custodial wallet or if it also includes the spot exchange it launched last January.

Future research

Publishing cumulative bitcoin balances and the number of addresses for different entities such as exchanges could help compliance teams and researchers better understand the flows between specific exchanges.  For instance, a chart that shows what percentage of the 15 million existing bitcoins everyone holds at a given moment over different time intervals.

This leads to the second area: rebittance, a portmanteau of remittance and bitcoin.  Last year it was supposed to be the “killer app” for cryptocurrencies but has failed to materialize due in part, to some of the reasons outlined by Save on Send.4 Further research could help identify how much of the flows between exchanges and the peer-to-peer economy is related to cross-border value transfer as it relates to rebittance activity.

And as the market for data analysis grows in this market — which now includes multiple competitors including Coinalytics, Blockseer, Elliptic and Scorechain — it may be worth revisiting other topics that we have looked at before including payment processors, long-chains and darknet markets and see how their clustering algorithms and coverage are comparable.


For compliance teams it appears that the continued flow between illicit corridors (darknet markets) is largely contingent on liquidity from two specific exchanges: BTC-e and LocalBitcoins.  In addition, coin mixing is still a popular activity: from this general birds-eye view it appears as if half of the known mixing is directly related to darknet market activity and the motivation behind the other half is unknown.

Based on the information above other economic activity is still dwarfed by arbitrage and peer-to-peer transactions. And lastly, based on current estimates it appears that several million bitcoins are being stored on the intermediaries above.

[Note: special thanks to Michael Gronager and the Chainalysis team for their assistance and feedback on this post.]

  1. There are many regional smaller projects in, for example, smaller European countries whose flows may be underrepresented as they are less known in part because they do not use commonly used languages. However most are likely a part of the long tail of coin distribution. []
  2. There is a spectrum of intermediaries in which bitcoins are stagnant (or active).  For instance, in an interview last May, Wences Casares, founder and CEO of Xapo stated:

    Still, Casares indicated that Xapo’s customers are most often using its accounts primarily for storage and security. He noted that many of its clientele have “never made a bitcoin payment”, meaning its holdings are primarily long-term bets of high net-worth customers and family offices.

    “Ninety-six percent of the coins that we hold in custody are in the hands of people who are keeping those coins as an investment,” Casares continued. []

  3. See also The missing MtGox bitcoins from WizSec []
  4. There are notable exceptions that have gained regional traction including: BitX, Coins.ph and Align Commerce. []
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AFA Presentation: Cryptocurrencies, Blockchains and the Future of Financial Services

The slideshow below was first presented at an AFA panel on January 4, 2016 in San Francisco.


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A proxy for users

[Note: opinions expressed below are solely my own and do not represent the views of my employer or any company I advise.  Today is the 7th anniversary of the Genesis block.]

With over $900 million invested in cryptocurrency startups over the past couple of years, what does adoption and usage numbers look like?

Unfortunately very few of the companies that have received funding have publicly divulged actual numbers, primarily because consumer uptake has been lower than expected (or promised).

For instance, Coinbase recently published five charts it says reflect growth.

The first chart they show is transactions per day.

However, since we know that most transactions are “long-chain” transactions (comprised of spam, wallet shuffling, coin mixing, mining payouts, faucets, etc.), this is a poor indicator of actual on-chain trade and commerce or adoption.

long-chain transactionsAs illustrated in the chart above, once long-chains are removed, growth (as highlighted in the pink region) is roughly linear since 2014, at ~0.5x per year.

What about Coinbase itself?

Coinbase doesn’t typically divulge much about specifics, however it’s older pitch deck (from September 2014) does give a few details about its users, such as 40% of all Coinbase users are from three states: California, New York and Texas; as well as the amount of deposits that Coinbase holds for each customer.

wallet size

Slide 14, Coinbase pitch deck

While this number likely has changed in the past 15 months, ignoring the fluctuation in token prices it may be the case that the average deposit per customer has not increased significantly.  Why might that be?

Above is a 1-year chart produced by Coinbase showing the daily amount of off-chain transactions.  Or rather, transactions that take place on their own internal system.  As we can see, the volume is roughly the same across all of 2015.  If usage actually was increasing or user numbers were growing substantially, then we should be able to see some visible changes upward.  This has not occurred.


P2SH chart

Source: P2SH.info

P2SH, or pay to script hash, is probably the most common method for securing bitcoins (or UTXOs) via multisig.  As shown in the two charts above, over the course of 2015 the percentage of existing bitcoins held in P2SH addresses increased from 6% to around 10% today.  Though over the past 5 months the amount has effectively plateaued.

According to marketing material, BitGo processes more than 50% of all P2SH transactions (more than all other service providers combined).  So this may also be an upward bound indicator of people who are savvy enough to secure their bitcoins via multisig (note: many custodial wallets such as Coinbase and Xapo purportedly secure certain layers of “cold wallets” via multisig and P2SH is just one method of doing so).

Multisig and Top Rich List

The chart above visualizes the percent of bitcoins owned by each address balance range.

As of block height 390,000 approximately 98.16% of all bitcoins reside on 513,648 addresses.  This is not to say there are only half a million bitcoin users on the planet, as some of the addresses are owned or controlled by multiple people (such as a custodial wallet or exchange).  But it is probably a pretty good proxy of on-chain users — users who actually control the private key and do not use an intermediary.

This is roughly twice as many on-chain users as twenty-one months ago (in April 2014) — at block height 295,000 — when I first started looking at this source.1

One interesting trend that ties in with the multisig window above is that at one point as recently as April 2014, none of the Top 500 addresses were using multisig.  But over the past year, as seen by the “3” prefix at the start of addresses, we can visibly see several dozen Top 500 addresses that now use multisig (note: some of the other addresses may use hardware wallets such as Trezor, Ledger or Case and not use multisig).


bitcoin atm

Source: CoinATMRadar

I once heard a Bitcoin reporter tell me in the August 2014 that BitAccess was on track to be the first billion dollar Bitcoin company.  Whoops!

As we know empirically, the ATM industry in general is very low margin; companies make it up on volume which none of these startups have been able to thus far.  Despite the hype, over the past a grand total of 536 Bitcoin ATMs have been installed, roughly 275 per year.

For comparison, according to the ATM Association there are roughly 3 million ATMs globally.

Can’t this change in the future?   Perhaps, but recall that the average two-way (roundtrip) Bitcoin ATM fee is ~11% and there are only a handful located in emerging markets.  Why is the fee relatively high?  Because ATM owners are not operating charities and want to turn a profit.  If Bitcoin adoption truly was going gang busters you would expect this number to be growing exponentially and not linearly.

Bitcoin volatility

bitcoin volatility seriesAdmittedly this chart doesn’t have to deal with adoption.  There is no scientific correlation between the amount of usage or users of cryptocurrencies and the volatility of its trading pairs.

The reason I have included this is because in the Coinbase post above they state that bitcoin volatility is decreasing… relative to the Russian ruble and Brazilian real.  Yet from the volatility chart above, it is clear that volatility has not really decreased.  The BTC/USD volatility may be less than what it was in 2012, but on any given day it is still 10x more volatile than CNY/USD and 6x more volatile than USD/EUR — trading pairs that represent the real lionshare of global economic activity.

VC Funding

vc funding

Source: btcuestion / Coindesk

The chart above was created by user “btcuestion” and is based on data in the Coindesk venture investment spreadsheet.  It is a month by month bar chart over the course of the past two years.

What it shows is that VC investment in cryptocurrency-related startups peaked in Q1 2015.  Yet, the bulk of the Q1 investments came from the 21inc announcement which itself was an aggregation of its previous rounds that had taken place over the previous 18 months.  So funding may have actually peaked in Q4 2014.2

What this probably illustrates is that aside from a couple of permabull investors (such as Boost and Pantera), most serious venture capital has decided to wait and see how the dust settles before investing anything in this space.  Why?  Basically there has been no product market fit and few viable business models.3  Sure there has been a lot of publicity, but as Kevin Collier recently explored, there does not appear to be any permanent impact of say: Bitpay sponsoring a college bowl game last year.4

Bitwage activity

user signups

Source: Bitwage

payroll volume

Source: Bitwage

The two charts above both come from Bitwage, a startup that converts payrolls into bitcoins.  Ignoring the drop-off in January 2016 (it is the beginning of a new month), for most of 2015 there were roughly 200-300 new user signups each month and about $250,000 in salaries converted as well.

Again, this is not to say that Bitwage’s service is not useful, rather that if there was increased bitcoin growth and adoption, then one proxy could be through payroll conversion.  However, as shown above, growth is linear not exponential.

Blockchain.info wallets

Above is a 2-year, nearly linear line chart from Blockchain.info depicting the “My Wallet” Number of Users.  It bears mentioning that many people still use Blockchain.info wallets like a “temporary” wallet (or burner wallet) for coin mixing, yet despite the rapid creation rate for this purpose even if we look just at the last 6 months, it is not close to being exponential.

Hash rate

But what about hash rate?  It has continually gone up and to the right the last few months, surely this is an indicator of mass adoption?

All hash rate is measuring is the amount of work being generated by an unknown amount of computers (typically ASICs) somewhere on the planet.  Hash rate typically rises when the price of bitcoins rise and falls when the price of bitcoins fall (see Appendix B).  Since prices have nearly doubled over the past four months then it stands to reason that hash rate would correspondingly increase as hashing farms deploy new capital.5

Unless each site is inspected, it’s difficult to tell if there are more hashing farms and equipment and therefore “more users.”  However, what we do know is that there are roughly the same amount of pools today (~20) as there were three years ago.6


counterparty transactions

Source: Blockscan

Counterparty is an embedded consensus system (see section 1): an asset issuance platform that effectively staples itself onto the Bitcoin blockchain.

As shown above, on a given day roughly 500-1000 transactions take place through the platform.  According to Laurent MT, the spikes may be related to the weekly distribution of LTBCoins.  And again, despite turnkey services and vending machines such as Tokenly and CoinDaddy (and CounterpartyChain), overall growth on the ECS has effectively plateaued over the past year.


Bitcoin is a solution and service provider for those who hold bitcoins.  Despite the fanfare, the conferences and the perpetual feel-good op-eds in Techcrunch, the only people who seem to use it regularly seven years later are a niche demographic group: young, white, tech-savvy men in North America and Western Europe.  Many of whom have access to multiple other payment networks and asset classes for investment.

As a result, it is probably not a surprise that instead of using bitcoins to pay for coffee on-chain each day, most private key owners prefer to “hodl” or use intermediaries.  This may make sense for those with low time preferences, but it shouldn’t then come as a surprise that there are few, if any metrics that show wide-scale adoption beyond this core demographic.  Will this change in 2016 or will the “great pivot” continue?

  1. Spam and dust (such as “tips”) likely represents the remaining 1.84% of all bitcoins (located on 99% of all addresses). []
  2. Funding has instead switched over to the fledgling non-cryptocurrency distributed ledger industry. []
  3. Anecdotally, it appears that Coins.ph, BitX and Align Commerce have each gained actual traction in their respective regions. []
  4. Stephen Pair provided a new chart for Forbes which purportedly shows a large uptick in transactions processed.  This “surge” occurred during the same month as Bitcoin Black Friday and should be looked at again in the following months to see if it was a one-off event. []
  5. There are also stories of new chips supposedly being deployed.  In practice hashing farms do the Red Queen race: replace a machine… with another machine that uses the same amount of energy. []
  6. The claim that 21inc or other mining chip manufacturers will “redecentralize mining” is a misnomer.  Mining and hashing are not the same thing.  Unless a hashing operator also runs a fully validating node, then they are part of the outsourcing process.  More people may be hashing as part of the 21inc botnet, but not mining (mining is defined as selecting transactions to include in blocks; hashers do not do this activity, pools do). []
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More events and articles

The past couple of months I’ve attended a number of events and written a few external articles.  Below is a compilation of them.


Interviews and op-eds:


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Anchor’s aweigh

One comment I have noticed continually re-appear on social media over the last couple months is roughly the following:

If you’re building a new blockchain you should regularly take a hash of the network state and “anchor” it (write it) into another blockchain, for redundancy purposes.

This “anchor” idea has appeared in public material from BitFury, Factom, Tierion, Gil Luria and now 21inc (a VC-backed botnet operator).

Part of the current popularity in the anchoring meme is that some cryptocurrency enthusiasts and Bitcoin maximalists in particular want other non-cryptocurrency distributed ledgers to rely on existing cryptocurrency networks — networks that some enthusiasts own tokens to and hope that price appreciation will take place in the event that the network is used.

Ignoring the hypothetical monetary incentives, let’s assume that writing/storing network states externally is useful and it is the goal of every blockchain designers such as Bob and Alice.  Are other blockchains the only relevantly secure places that all blockchain designers should look at using?

Probably not.

For instance, if the goal is to publish a hash of a state in a media that is difficult to censor and widespread enough to retrieve over time, then there are several “old school” newspapers and magazines that can be used for such purposes (which is what Guardtime does).

For instance:

  • There are half a dozen Japanese newspapers that each have over 2 million in circulation.
  • In the UK, both The Sun and Daily Mirror have a circulation of over 1.5 million
  • Similarly, in the US, there are three companies: USA Today, The New York Times and The Wall Street Journal that also have a circulation of over 1.5 million

The question for the paranoid is, what is more likely: someone deliberately destroying and/or replacing 1.5 million newspapers which contain the hash of the network state, or someone knocking out 5,728 network nodes?

While “anchoring” the hash of state into other media may be useful, leaving it in just one blockchain — such as the Bitcoin blockchain — does not fully reduce the risk of a well-funded attacker trying to revise history.  Safety in this case comes in numbers and if it is redundancy Bob and Alice are looking for (and paranoid about), it may be worth it to publish hashes in multiple venues and media.

Similarly, if sustainability is a key concern then public goods such as cryptocurrencies have a question mark on them as well. Why?  Because there are over 100 dead altcoins now.  Convincing users — and more importantly miners — to maintain a network when it is no longer profitable to do so is an uphill challenge.1

Lastly, a well designed network (or distributed ledger in this case) that is robust and mature should not necessarily rely on “anchoring” at all.  But this dovetails into a different conversation about how to design a secure network, a topic for another post.  Either way, hash-storage-as-service, is probably not the next big trillion dollar idea for 2016.

  1. It’s a challenge for any public good, not just Bitcoin, that eventually relies solely on altruism and charity. []
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