- The Miner’s Rolling Inventory can be a useful tool to identify crypto market sentiment based on how miners are maintaining their inventory
Crypto traders need as many tools as they can get their hands on in order to get an edge when trading, and one extremely useful but perhaps not well-known tool that can be used to determine crypto market sentiment is Miner’s Rolling Inventory (MRI).
The MRI is the amount of Bitcoin that miners spend from their inventory divided by the amount of Bitcoin generated from mining during the same period, and then this ratio is multiplied by 100 to create a percentage. An MRI above 100% indicates that miners are selling more inventory than they are mining, i.e. their inventories are decreasing, whereas an MRI below 100% indicates that miners are HODLING and selling less inventory than they are mining.
For example, as of this writing in the past five weeks, miners have spent on average 6,361 Bitcoins per week and have mined 6,713 Bitcoins per week. This generates an MRI of 94.77%, which indicates that miners are selling less Bitcoin than they are mining.
At first, it may seem that an MRI below 100% is bullish since miners are HODLING if the MRI is below 100%, and that an MRI above 100% is bearish since miners are selling off.
However, that is the opposite of the truth. ByteTree, which is the blockchain analytics firm that calculates real-time MRI data, conducted a study where they calculated how much money someone would earn if they only held Bitcoin during times when the MRI was above 100% and sold their Bitcoin when the MRI dropped below 100%. Also, ByteTree calculated the opposite case, where someone only holds Bitcoin when the MRI is below 10% and sells their Bitcoin when the MRI rises above 100%.
It was found that only holding Bitcoin when the MRI is above 100% led to greater returns than if just simply buying and holding Bitcoin, with bigger gains during bullish times and fewer drawdowns during bearish times.
The most stunning result was that if only holding Bitcoin during times when the MRI is below 100% it led to a loss of money long term despite Bitcoin’s price increasing by over an order of magnitude since 2014.
In other words, ByteTree has confirmed that MRI can truly diagnose when Bitcoin is bullish or bearish. In fact, this experiment suggests that the MRI is such a powerful indicator that it can beat the market long term, simply by selling off Bitcoin when the MRI drops below 100% and HODLING when the MRI is above 100%.
Notably, ByteTree found that an averaging period of 3 weeks or greater for the MRI yielded the most profits.
The theory behind why the MRI indicator works in this way is quite simple. Essentially, miners decrease the amount of inventory that they are selling during times when market liquidity is lacking, and increase the selling of their inventory when there is abundant liquidity.
Basically, miners are keen on optimizing their profits, and also have an interest in preserving the Bitcoin market, so they sell more Bitcoin when the market has plenty of liquidity and can handle the selling, while miners sell less Bitcoin during times when the market is lacking liquidity and would be damaged by a significant selloff.
In other words, the MRI is a good proxy for liquidity in the Bitcoin market, and liquidity is a good proxy for how healthy the market is.
Therefore, an MRI above 100% is bullish, since it indicates that the Bitcoin market has abundant liquidity and demand, while an MRI below 100% is bearish since it indicates the Bitcoin market is lacking liquidity and demand.
On a final note, real-time MRI data can be found at this link. Although past performance of trading indicators is not a guarantee of future performance, the MRI seems to be one of the better crypto market indicators out there.
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