Bitcoin Confirmation Indicator

Is average bitcoin confirmation time a useful trading indicator to consider?

Let's start by reading this comment from Reddit. The user believes that they have identified confirmation time correlations worth looking at:

Blockchain data as trading indicator

SOURCE: reddit | u/shaigan_ | 4/28/2019

Hi everybody. I've been following this community for a while now but never shared much, and today I wanted to give back something to those who have helped me understand this market.

For the last months, I've been building a Bitcoin trading algorithm based on a machine learning model. At first I only used classic trading data (OHLC prices, volume, standard deviation etc.) but I have made a lot of experimentation to integrate blockchain features to my model, in order to find an edge to compete with the majority of people only using purely financial data.

One of the only blockchain metrics that I often see discussed here is the number of transactions. Surprisingly, I have found that this particular metric didn't improve the performance of my bot at all. I have come to the same conclusion with a lot of other blockchain features which seemed promising, like number of adresses, mining profitability, block size etc. but had no positive effect on the performance of the algorithm.

But there is one metric, that I would have never thought about in the beginning, that drastically improved the performance of my model: confirmation time. I was surprised at first, but after thinking about it, it is obvious why it is an excellent trading indicator.

Small and fast recap for those of you who don't know: the Bitcoin protocol is designed so that in average, a new block is mined every 10 minutes. The mechanism behind that is that the so-called "difficulty" level is automatically adjusted once every two weeks in average so that with the current combined hashrate of all miners, this confirmation time stays around 10 minutes. If this confirmation time is above 10 minutes for two weeks, the difficulty will be decreased and vice-versa.

When a new block is mined, the miner (or miners network) who found it is currently rewarded with 12.5 bitcoins (12.5/2 = 6.25 after the halvening).

This means that in average, the supply of bitcoins increases by 12.5624 = 1800 btc every day.

Due to the difficulty adjusting only once every two weeks and hashrate varying quite a bit, it is not exactly 1800 btc/day but in a range between around 1200-2400 btc/day.

And guess what, this is A LOT. On major exchanges today, the volume on "normal" days is only a few thousand bitcoins (~6k on Bitfinex), and around10x more on crazy days with daily Bitcoin volumes around 50k. This means that most of the time, the daily supply of new bitcoins mined is equal to a very high percentage of the daily volume traded (from 30% on calm days to 3-5 percent on crazy days) on major exchanges. The last very important information is that most miners operate on thin financial margins, which means that most of them sell their Bitcoin rewards right away when they get it, or during the few days after they got it. This has been quite well documented, and is proved by the fact that a lot of miners went bankrupt very fast during the 2018 bear market. There may be some miners who are hodling a little of their rewards but the great majority sells their bitcoin fast.

All of this means that when the confirmation time is increasing, you can expect the selling pressure to drop during the next days, and vice-versa.
Obviously, not all the miners sell on the same exchanges, but just to get an idea, you can check on the order books the influence of an amount of Bitcoin sold on the price variation (a couple hundreds btc bought/sold can cause a 1% price change). You can see that even a small percentage of 1200 or 2400 btc sold in one day can make a huge difference on the impact on the price.

I could talk about it forever but I think you get the idea and this post is already much longer than I intended.

Sorry for any spelling/grammatical mistakes, I'm French.

You can track the performance of my bot on the position bot. Of course, bad luck made me start to post my positions there just before the Bitfinex FUD and I'm trading on Bitfinex, but you will get a better idea of the bot's performance when it has run for a few weeks.

I'll be more than happy to answer any question in the comments.

Cheers, and get rekt safe.

tl;dr: Average bitcoin confirmation time is a great indicator to consider. Increasing block confirmation time leads to lower sell pressure and vice versa.

More analysis needed.