Understanding the transformation in the structure of crypto markets, its players and sectors — and how it is likely to continue to develop in the future.
Throughout its 13 years of existence, crypto has materialized from a merely speculative vehicle to one ingrained in society creating deeper value. This transformation has taken place throughout the ebb and flow of cycles going from irrelevance to deep interest in the technology. As this has carried on, the structure of the space has evolved with each bringing a new wave of market participants and sectors leveraging this technology.
In the first part of this piece, we’ll focus on the players involved in crypto and how they are shaping these markets. Specifically, we observe the transition from crypto being a retail-led phenomenon to being dominated by institutional players. Along with this, there is an increasing long-term focus from the players involved, shifting the dynamics affecting the market and the space altogether.
The Evolution of Players in Crypto
Understanding the participants of a market is key to analyzing it. In crypto’s case the participants involved have vastly changed throughout its history of just over a decade. We can classify these investors based on their size and investment horizon. Based on these factors we see that Bitcoin, and crypto broadly, has progressed from being a toy to a major force in the global economy.
Prior to 2011 only a handful of tech hobbyists and libertarians were familiar with Bitcoin. Throughout this time, the dominating narratives for crypto were for it to be used as peer-to-peer currency and as untraceable dark-web money. With the emergence of the anonymous marketplace Silk Road, this type of nefarious use-case flourished.
In this period between 2011 and 2013, Bitcoin experienced its first major shift in its holder base. Silk Road launched in February 2011 and shortly thereafter the percentage of addresses holding under 0.1 BTC grew rapidly. Back then Bitcoin’s price was still under $1 and the average transaction size was around $100, so the 0.1 BTC in these addresses was likely “dust” remaining following a transfer on the Silk Road.
At this point, the main players involved in Bitcoin were individuals, few of which saw it as a long-term investment. As more infrastructure around crypto started to get built, however, things started to change.
From late 2011 to 2013, key crypto infrastructure was built, from block explorers to wallets to exchanges. Along with these companies, we saw the first investments in the space from large tech venture capital funds and accelerators such as Andreessen Horowitz (nowadays a16z), Union Square Ventures (USV) and Y Combinator.
As institutions started to build and invest resources on crypto, it brought the first cohort of long-term oriented participants to the space. These companies provided the base to onboard more users while making them and their investors structurally long on the crypto space.
This arguably began crypto’s institutionalization. Following the implementation of infrastructure such as wallets and exchanges, the size of the players involved grew. More traditional investors such as Ark entered the space and started investing in 2015. Then as Bitcoin broke its previous all-time high around $1,200, institutional activity took off.
One of the metrics we consistently follow at IntoTheBlock to gauge institutional adoption is the large transactions volume, which aggregates the total value of transfers of over $100,000. When putting large transactions volume relative to the total on-chain volume, we observe the increasing dominance of institutions in the crypto space.
From 2011 to 2014 the large transaction volume share spiked sporadically, making up a wide range between 5% up to 85% of all volume. Then in 2017 the up-trend in large transaction volume is clear and more frequent. Throughout this time, “institutions are coming” became the hopium driving prices and speculation, culminating with the launch of the CME’s Bitcoin futures contracts in December — the top for Bitcoin’s price in that cycle.
This brings us to the 2020s, where the large transaction volume was consistently above 98%, highlighting the overwhelming dominance of institutional players in Bitcoin nowadays. Following the covid-induced recession and subsequent record quantitative easing from the federal reserve, institutional activity reemerged strongly. A lot of this interest began with hedge funds treating crypto as a high-sentiment beta, then Wall Street icons calling Bitcoin a potential hedge to inflation and corporations adding Bitcoin to their balance sheets.
Then in 2021, the web3 narrative takes off and brings with it an unprecedented amount of investment into broad sectors of crypto, with some of the world’s largest investors — Sequoia, Tiger and SoftBank — first backing tokens in the space.
As the size of market participants grew throughout cycles, so did their time horizon. This has led to a contrast between addresses that have been holding over a year — hodlers — and those that have only held less than 30 days — traders.
This pattern, where hodlers sell part of their holdings to traders rushing in at all-time highs, has since become a major part of Bitcoin’s distribution. Hodlers continue to cyclically grow their holdings after prices correct, typically 50% or more as was the case in 2014, 2018 and now in 2022.
The four-year cyclicality here is the basis to the “traditional” Bitcoin cycles theory, where the halving of mining rewards purportedly acts as a catalyst for the next run-up. This is often complemented by the stock-to-flow ratio where models of Bitcoin’s price grow as its issuance drops.
While this sounds compelling, though, it is unlikely to remain as straightforward and predictable. The main reason for this is that miners are an increasingly irrelevant player in terms of the volume they trade.
Bitcoin miners used to be one of the largest sellers as they had to in order to fund their operations. However, as volumes grew driven by institutional players and miner rewards dropped from 25 BTC to 6.25 BTC, miners now represent less than 1% of the total volume.
It used to be that each halving relieved a portion of selling pressure as miners controlled a large share of volume and the amount they produced plummeted. This time, if miners’ volume share drops from 1% to 0.5%, it is improbable that there would be any tangible impact on Bitcoin’s selling pressure. If anything, the expectation of the halving being bullish may end up being more bullish than the halving itself.
For this reason, future crypto cycles will likely be driven by demand forces rather than supply shocks. This debunks the stock-to-flow model and sets the base for a broader technological and societal paradigm shift to drive crypto. As the players dominating the market are now largely institutions, large scale factors are necessary for the space to continue to grow. We may have seen the beginning of this as corporations began adding Bitcoin to their balance sheets, and at an even larger scale with El Salvador adopting it as legal tender.
Moreover, the majority of existing market participants now see Bitcoin as a long-term investment, with 57% of addresses holding for over a year. Most of the supply held by these addresses is illiquid as it does not typically move and is likely held in cold storage. This illiquidity exacerbates the impact that these demand forces have on crypto, propelling it further.
In Part II of this article we’ll dive into the demand coming into crypto across multiple sectors.