Bitcoin’s unspent transaction outputs (UTXO) and its long-term implications

[Hold-n-play]

Dear esteemed bitcoin community,

 I have read some interesting articles focused on Bitcoin’s unspent transaction outputs (UTXO) accounting system and public timestamping of transactions and would like to share it for your comments.

https://medium.com/galaxy-digital-research/price-implications-of-bitcoin-utxo-age-changes-6ec8e1dd6a62

"...increases in the warmer bands suggest that coins that were previously held are now on the move and indicate a higher velocity of the monetary base.
According to traditional economic theory, higher velocity, ceteris paribus, leads to higher prices of a monetary base. We can also consider situations where longer-term holders moving “cold” coins to sell them should correlate with lower prices. Conversely, there should be a positive relationship between changes in older age bands and price: an increase in older bands suggest that individuals are holding more Bitcoin and therefore should correlate to higher prices."

A couple of additions: Remember that every UTXO amount is written as a binary number in Satoshis. In other words, for example, instead of UTXO with .5999 BTC, you actually have 59,990,000 sats. But every Bitcoin transaction browser and wallet however, will immediately divide this number by 100,000,000 and convert it to BTC.

Also, in Bitcoin, inputs and outputs do not have to be equal. In other words, outputs can be less than the inputs, and the difference is the actual transaction fee. Many miners reluctant to accept zero-fee transactions, so in effect no transaction's inputs and outputs are equal anymore and still getting into the blockchain.

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[DannyHamilton]

EDIT: corrected an oversight in my description of total inputs and outputs for a block (thanks for catching that o_e_l_e_o).

every Bitcoin transaction browser and wallet however, will immediately divide this number by 100,000,000 and convert it to BTC.

This is not entirely true.  There are many services now that will display the value in Satoshis, or millibitcoin, or microbitcoin. Some even attempt to look up a reasonable current exchange rate and then show the equivalent local government fiat currency value.

Also, in Bitcoin, inputs and outputs do not have to be equal. In other words, outputs can be less than the inputs, and the difference is the actual transaction fee.

This is true, however, the outputs can never be greater than the inputs. Furthermore, if you add up the value of all the inputs in a block and all the outputs in a block, the sum of the inputs plus the current block subsidy (6.25 BTC today) will almost always be equal to the sum of the outputs. This is because the method miners (or mining pools) use to receive the transaction fees is to add them to an output in the generation transaction along with the current block subsidy.

It is possible for a miners (or mining pools) to NOT add the full value of the fees into the generation transaction. If they do that, then the missing amount permanently vanishes from the global bitcoin supply.  This is a very dumb thing for a miner (or pool) to do. Why would they put all that time and money into mining, and then burn the value that they could have earned? It has happened a few times in the past though (likely due to bugs in the software that the miner (or mining pool) was using.

[pooya87]

The fundamental flaw with this type of argument is the fact that coins moved is not equal to coins sold. So when you say something like "We can also consider situations where longer-term holders moving “cold” coins to sell them should correlate with lower prices." you have no way of knowing whether the coins that were moved were actually sold or simply moved to another address. For example I have had old coins that I moved to a new wallet simply because I wanted to dump the shitcoin airdrops by importing the empty key into the shitcoin wallet like BCH for example, but that didn't mean I sold those bitcoins that I moved after many years.

[o_e_l_e_o]

Many miners reluctant to accept zero-fee transactions, so in effect no transaction's inputs and outputs are equal anymore and still getting into the blockchain.

It's not that miners won't accept zero fee transactions, but rather that nodes won't accept them. The miners won't even see the zero fee transactions because nodes will reject them and refuse to relay them to other nodes. Zero fee confirmations are still perfectly valid, and miners are quite happy to include their own zero fee transactions. For example, here are a couple from a recent block:
https://mempool.space/tx/bf1b227593c148f6c350ba4eb13422747d337421df3776976ab569864d22a2cc
https://mempool.space/tx/0f03e31fc7226e1641b9a60a426feffc719934f512f453ebc8dbc322877d6070

Furthermore, if you add up the value of all the inputs in a block and all the outputs in a block, those two will almost always be equal.

Don't forget the block subsidy, which will mean the sum of the outputs is (usually) 6.25 BTC more than the sum of the inputs.

It is possible for a miners (or mining pools) to NOT add the full value of the fees into the generation transaction. If they do that, then the missing amount permanently vanishes from the global bitcoin supply.

They also don't have to add the full value of the block subsidy. They can claim any amount between 0 and the sum of (subsidy + fees).

[DannyHamilton]

Don't forget the block subsidy, which will mean the sum of the outputs is (usually) 6.25 BTC more than the sum of the inputs.

Correct. Fixed my post.  Thanks.

[garlonicon]

This is true, however, the outputs can never be greater than the inputs.

This is partially true, because you can make some incomplete transaction, where outputs are greater than inputs, then another party can add coins, and make it complete, without invalidating previous signatures.

[Hold-n-play]

EDIT: corrected an oversight in my description of total inputs and outputs for a block (thanks for catching that o_e_l_e_o).


It is possible for a miners (or mining pools) to NOT add the full value of the fees into the generation transaction. If they do that, then the missing amount permanently vanishes from the global bitcoin supply.  This is a very dumb thing for a miner (or pool) to do. Why would they put all that time and money into mining, and then burn the value that they could have earned? It has happened a few times in the past though (likely due to bugs in the software that the miner (or mining pool) was using.

Agreed, it would not make any sense

[DannyHamilton]

This is true, however, the outputs can never be greater than the inputs.

This is partially true, because you can make some incomplete transaction, where outputs are greater than inputs,

Such a transaction would be considered invalid by any Bitcoin node and/or miner. You can do ANYTHING you want with a transaction, but if it's not a valid transaction then the entire system will ignore it and it isn't really a bitcoin transaction yet, is it?

then another party can add coins, and make it complete, without invalidating previous signatures.

At which point it becomes a valid bitcoin transaction, and the sum of the inputs are greater than or equal to the sum of the outputs. It can then be broadcast on the Bitcoin network and will be accepted by nodes and miners.

[Quickseller]

Many miners reluctant to accept zero-fee transactions, so in effect no transaction's inputs and outputs are equal anymore and still getting into the blockchain.

It's not that miners won't accept zero fee transactions, but rather that nodes won't accept them. The miners won't even see the zero fee transactions because nodes will reject them and refuse to relay them to other nodes. Zero fee confirmations are still perfectly valid, and miners are quite happy to include their own zero fee transactions. For example, here are a couple from a recent block:
https://mempool.space/tx/bf1b227593c148f6c350ba4eb13422747d337421df3776976ab569864d22a2cc
https://mempool.space/tx/0f03e31fc7226e1641b9a60a426feffc719934f512f453ebc8dbc322877d6070

I don't think most miners will be willing to accept zero fee transactions, even if they were aware of them. Unless they were receiving a fee via some channel outside of the transaction.

"...increases in the warmer bands suggest that coins that were previously held are now on the move and indicate a higher velocity of the monetary base.
According to traditional economic theory, higher velocity, ceteris paribus, leads to higher prices of a monetary base. We can also consider situations where longer-term holders moving “cold” coins to sell them should correlate with lower prices. Conversely, there should be a positive relationship between changes in older age bands and price: an increase in older bands suggest that individuals are holding more Bitcoin and therefore should correlate to higher prices."

Monitoring for moved coins is more difficult than looking at the age of particular inputs without additional context. Exchanges for example, will keep most of their customer deposits in cold storage, and this cold storage may not move for a long time, even if the sum total of withdrawals from the exchange is very large, if the exchange receives more deposits than withdrawal requests. Some people may also have sent their bitcoin to cold storage years ago, and with the advent of new technology, they may decide to create new private keys via various means that were not previously available (hardware wallets, for example).

[NotATether]

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Maybe moving them with a CoinJoin will make things less suspicious, as those have multiple inputs from different users (who cannot possibly be selling their coins) as do mixers.

[pooya87]

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Maybe moving them with a CoinJoin will make things less suspicious, as those have multiple inputs from different users (who cannot possibly be selling their coins) as do mixers.

CoinJoin is not going to change anything because the sell off you are talking about (it's always a small one by the way) is caused by the FUD that is spread by malicious organizations such as whalealert and they don't care where the coins are going or where they are coming from. They just create FUD and their followers panic sell.

[o_e_l_e_o]

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Keep them split across multiple addresses. People might not even notice a few thousand transactions of <10 BTC over the space of a couple of days, but will definitely notice a single transaction of >10,000 BTC.

This kind of watching for large transactions really annoys me, exactly because it is so unscientific and nontechnical and exists only to create panic for absolutely no reason. My most hated example of this is the Whale Alert twitter, which I deliberate will not link to since it is such trash. I remember back in 2018 when Coinbase announced they were upgrading their cold storage system and therefore would be moving around $5 billion in bitcoin. They made announcements weeks in advance, posted constant updates on their progress, and all the large transactions came from addresses which were known to belong to Coinbase. And yet Whale Alert still spammed tweet after tweet panicking about these large transactions, which a bunch of low quality crypto "news" sites (you know the ones) picked up on with stupid stories about how some massive unknown whale was preparing to dump all these coins, which then spread through Twitter, Reddit, and so on. The whole thing was a great insight in to the complete stupidity of many people in the crypto space, and how they believe literally anything they read with absolutely zero thought.

[ABCbits]

We can also consider situations where longer-term holders moving “cold” coins to sell them should correlate with lower prices.

We can detect holder move their coin easily, but there's limited way to know if they actually plan to sell their coin.

A couple of additions: Remember that every UTXO amount is written as a binary number in Satoshis. In other words, for example, instead of UTXO with .5999 BTC, you actually have 59,990,000 sats. But every Bitcoin transaction browser and wallet however, will immediately divide this number by 100,000,000 and convert it to BTC.

It's just how different software store and display such number.

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Maybe moving them with a CoinJoin will make things less suspicious, as those have multiple inputs from different users (who cannot possibly be selling their coins) as do mixers.

There's nothing much you could do when someone HODL their entire coin on one or few address (each with big amount). Moving to mixer/coinjoin which can be detected only from blockchain information (e.g. Wasabi CoinJoin) probably only change the FUD to criminal is laundering huge amount of BTC.

[NotATether]

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Keep them split across multiple addresses. People might not even notice a few thousand transactions of <10 BTC over the space of a couple of days, but will definitely notice a single transaction of >10,000 BTC.

That's actually a good idea. Maybe wallets can automatically do that when they receive a large transaction (or just one which causes the total value of inputs inside an address to be over a predefined threshold)

The whole thing was a great insight in to the complete stupidity of many people in the crypto space, and how they believe literally anything they read with absolutely zero thought.

At least we learned from this experience to expect slight dips in the price when exchanges upgrade their cold storage (because of the stupidity of the "whale-chasers").

[n0nce]

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Or what about the opposite idea?
Let's all collect a bit of fiat and then all together move our oooold UTXOs around a bit to cause a selling panic in the group of people that don't understand Bitcoin (the majority) so we can buy cheap Bitcoin?

This raises an interesting question. How can large HODLers move their coins without triggering a selloff due to the ridiculous proposition that all moved coins must have been sold?

Keep them split across multiple addresses. People might not even notice a few thousand transactions of <10 BTC over the space of a couple of days, but will definitely notice a single transaction of >10,000 BTC.

That's actually a good idea. Maybe wallets can automatically do that when they receive a large transaction (or just one which causes the total value of inputs inside an address to be over a predefined threshold)

I don't think so, rather, people should be educated and learn / understand Bitcoin and how moving coins doesn't mean selling them.

[garlonicon]

moving coins doesn't mean selling them

There are always two sides: if someone is selling, then someone is also buying. And by seeing amounts in satoshis, you can never be sure, if anyone even touched fiat at all, or maybe someone just bought a house for crypto.

[DannyHamilton]

moving coins doesn't mean selling them

There are always two sides: if someone is selling, then someone is also buying. And by seeing amounts in satoshis, you can never be sure, if anyone even touched fiat at all, or maybe someone just bought a house for crypto.

Or, maybe, ownership of the coins didn't even change. Perhaps they just moved the coins from one wallet that they own to another wallet that they own. Perhaps they are just moving the coins into cold storage.

[Zilon]

I don't think so, rather, people should be educated and learn / understand Bitcoin and how moving coins doesn't mean selling them.

How do we explain this to a layman who just got fascinated about Bitcoin because it will be assumed once there is a move of coin between wallets then it could mean selling. It is only the Hodlers who moved the coin that actually knows where it was moved to either to a personal alt wallet address or a purchase of either goods or service

[o_e_l_e_o]

How do we explain this to a layman who just got fascinated about Bitcoin because it will be assumed once there is a move of coin between wallets then it could mean selling.

Explain that it is the same as every other type of money. Every time fiat moves, does that mean it is being used to buy something? Of course not. People move fiat from checking accounts to cash, from cash to checking accounts, from their pocket to their wallet, from their wallet to a jar on their shelf, to and from checking accounts, savings accounts, investment accounts, retirement accounts, and so on. I would bet that most people move money around with spending it near enough every day. Bitcoin is no different. A transaction does not mean anything is being bought or sold.

I don't think so, rather, people should be educated and learn / understand Bitcoin and how moving coins doesn't mean selling them.

On the flip side, in almost any transaction of bitcoin the bitcoin could be changing hands. And so this could be seen as another aspect of taint analysis. Blockchain analysis assumes that bitcoin never changes hands, and if bitcoin were used illegally in the past then they are always tainted. Whale alert assumes that bitcoin always changes hands, and if bitcoin is being moved then it is being sold. Both are equally incorrect and equally stupid.

[BlackHatCoiner]

[...]

Besides taint analysis and blockchain analysis, there's this "on-chain analysis" (not sure if it's part of the latter) wherein people try to figure out what's happening to the market based on what's happening to the chain, which is also pointless. If a whale wants to create panic, they only need to move their money across their own wallet.

You acknowledge it's a nonsense, with just a quick search.

How does on-chain analysis work?

The metrics for on-chain analysis can be broadly classified into three categories — crypto market capitalization, an asset’s HODL status, and future prospects of the cryptocurrency.

No. Sense.