After developing its own methodology to better understand the use of bitcoin, Coin Metrics published in its State of the Network # 133 report an estimate of how many bitcoin wallets are used daily. The analytical firm estimated, based on measurements made last week, and based on 1 million active Bitcoin addresses, that there is a daily average of 500,000 active wallets.
The study It refers to the fact that the number of active addresses and addresses with a non-zero balance of BTC were, in the early days of Bitcoin, the best metric to estimate network use. It quickly became apparent that this approach had many disadvantages, since it overestimated the activity from large services such as exchanges, or betting services, says the report. These entities manage millions of addresses, but these do not correspond one to one with users or wallets.
To group addresses that belong to the same entity, heuristic methods have been used, says the report. Heuristics is the set of techniques and methods that allow solving a problem.
The addresses that an entity controls form what is called a ‘portfolio’. Individuals can own multiple wallets, but this is much less likely than owning multiple addresses, highlights the research.
There are several heuristic methods for grouping addresses into groups associated with a wallet. The most efficient is the so-called “shared input heuristic”, which was even mentioned in the Bitcoin White Paper, the report refers. This methodology, the authors point out, is also called Shared Input Property or Co-expense Heuristics.
Metrics on wallets to understand more about Bitcoin
As noted above, active Bitcoin addresses tend to overestimate unique users, as users generally tend to control multiple addresses. The graph below presents daily active addresses in contrast to daily active bitcoin wallets.
As a result of address pooling, the number of active addresses is generally greater than the active daily wallets, by a factor of 2, the study claims.
“Last week there were on average half a million active wallets per day, compared to roughly 1 million active addresses per day,” says Coin Metrics.
Researchers argue that portfolio metrics offer a better indicator on bitcoin users, but cautions that portfolios should not be construed as unique individuals. “There are groups of addresses that could be under the control of entities such as exchanges, which facilitate the activity of many users on a daily basis,” the analysis concludes.
The wallet metrics also provide another view on the distribution of bitcoin possession. The graph below shows the percentage of bitcoin supply associated with wallets of various sizes.
Coin Metrics highlights some of the limitations of these metrics. When the distribution is made by the balance of the addresses, the portfolios with a balance greater than 10,000 BTC appear with a higher percentage of supply than the addresses with more than 10,000 BTC, he highlights. This reflects large entities such as exchanges when grouped into portfolios, according to the report, and represents a limitation of the current methodology that groups addresses into entities.
The metric of “retention waves” or “hodling waves”, similar to this Coin Metrics methodology, was addressed by CriptoNoticias in September 2020, commenting on the Fidelity report Bitcoin Investment Thesis, with the difference that the BTC are grouped by age of the coins, instead of using the criterion of the balance of the portfolios.