HODL Waves has been around for a few years, but they are still relatively new. They were first featured in an article by Dhruv Bansal of Unchained Capital, a Bitcoin-native financial services company. The interesting thing about a transparent blockchain is that you can see all sorts of insights in the data. In particular, the price is just a granularity of Bitcoin, i.e. what the free market pays for the asset through buyers and sellers. By mixing data science with a transparent blockchain, you can learn a lot more about the market and look under the hood. This is not possible with traditional markets, which claim to be free and open. The Federal Reserve Board in particular has never really been scrutinized in a transparent manner, which leaves something to be desired.
Bitcoin has been made transparent with an unspent Transaction Output (UTXO) booking structure and is checked every ten minutes by every single contributor on the network (node). This makes it possible to see on-chain data and insights. This is what makes Bitcoin such a powerful base layer.
HODL waves are built from UTXO data. In very simple terms, there is a trail of breadcrumbs or “dust” that is left with every transaction. These dust UTXO particles have a date and time stamp that allow us to peek into the history of the Bitcoin blockchain. Unchained Capital went into more detail about UTXOs in their blog post here. Today I’m just going to focus on three different groups that show up in HODL waves.
Above you can see that there are different colors. Each color shows the age of the UTXO groups. 10 years is the oldest and 24 hours is the smallest. You can almost see the waves forming when you look at the climax of each cycle. Follow these up and to the right and you have the original HODL Wave.
The first HODL wave group that we can look at are the “lost coins”. These are coins that have been visibly inactive for 5-10 years. A number of different analyzes have been conducted that have resulted in an answer to lost coins, with it usually estimated that between 3-4 3 million to 4 million mining coins are lost. For context, Satoshi had an estimate of around 1 million bitcoin, all of which were never moved and are considered “lost”.
Both Unchained Capital and Chainalysis have taken more accurate measurements of lost coins and came out with a maximum of 3.8 million coins lost. These estimates were made in 2018 and 2017 and have held up very well. Over time, we can assume that fewer and fewer coins will be lost. As wallets and security get better, and the technology matures, it becomes significantly more difficult to lose Bitcoin.
If we look at the lost coin group above, we can see that with around 18.5 million coins mined, 22% of them are between 5 and 10 years old. There are few changes in the group, but for the most part they are unchanged. This means that 22% of all coins mined are currently being lost, possibly forever. This is very important to be aware of because not only is Bitcoin’s upper limit 21 million, but that number is also immutable. If someone loses their coins, they are gone forever. There are no bailouts or do-overs. This also applies to gold. If you lose all of your gold in a boating accident (oh no!) It is lost forever. This makes Bitcoin even scarcer and therefore more valuable.
Fortunately, Bitcoin’s ease of use is growing day by day and we are seeing ever more secure ways to store your keys. Between multi-sig, new wallets, estate solutions and encrypted backups, Bitcoin is getting harder to lose. Not to mention that the importance and dollar value are exponentially higher than in the early days, so naturally most people make greater efforts to preserve their Bitcoins in the long term than they did in the early days. It’s no longer just magical internet money.
Long term owner
The second group are the “long-term owners”. It is categorized according to the grouping of UTXOs between six months and three years. This usually manifests itself between bull markets or rapid price rises in the lower time frame. This wave tends to occur after the bull market is over. These UTXOs appear to be drained as the bull market intensifies.
While not perfect, you can use this as a tool to see where we are on the bull run. There has been a clear increase in long-term owners compared to 2015-2017, which peaked at the start of the Bull Run. As the price began to rise, the long-term owners began to sell. The bottom was exactly at the height of the 2017 bubble.
There was a short-term accumulation phase in the 2012-2014 Bull Run, which showed up at the peak at the end of 2013. These waves are not predictors, but seem to be laggards and just a history book of what happened during the phase.
Short term owner
The third group are the “short-term holders”. They are divided between a day and a month. These seem to have reached their peak with enormous price jumps in the history of Bitcoins. If you look carefully, you can see three big price spikes for every bull run. We are currently only at the first price surge. It looks like this could be retail and short-term speculators.
In 2012 we saw the first big price hike, which went into a consolidation and then a ramp-up. This was repeated in 2016, but was a steady rise in price that was a gentler landing in a single blow-off top than in a double bubble. This short-term HODL wave will be interesting to watch over the coming months.
Visualization of bull and bear markets
If you put them next to each other, you can see a clear difference between a bull and a bear. The long-term owners give way to the short-term when the price rises, which eventually ends the bull market when there is no more to buy. Since a price increase is simply more of a buyer than a seller, this makes sense. I won’t be making price predictions here, but it does appear that UTXOs and HODL waves are evolving or maturing. As wallet / security technology improves and Layer 2 solutions mature, these UTXOs will look different. Bitcoin is developing at a rapid pace, so this could be the last year we see these types of signatures on the blockchain.
Realized HODL ratio
Finally, when you look at the difference between long-term and short-term owners, you can work out a ratio. Glassnode created this visual and it seems to track the boom and bust cycles of the past pretty well.
“The Realized HODL Ratio is a market indicator that uses a ratio of the Realized Cap HODL Waves. In particular, the RHODL ratio assumes the ratio between the 1-week and 1-2-year RCap-HODL bands. In addition, it takes account of the increased supply by weighting the ratio with the overall market age. A high ratio is an indication of an overheated market and can be used to measure cycle highs. This metric was created by Philip Swift. ”- Glass knot
According to this metric, the bull market is far from over and seems to be behaving more similarly to the bull market of 2014. While this is not an indicator of future success, we can infer something from this data.
On-chain data is still relatively new, but it has given us a lot of insight and will continue to show new and exciting things within the Bitcoin blockchain. All of this is possible due to the UTXO structure in the Bitcoin network and the transparency of its transactions. Ultimately, Bitcoin will evolve and mature, leaving different metrics behind as layers are built on top of it and transactions migrate from one layer to another. There’s no way of telling what the future holds, but watching the journey through data is more exciting than ever.
This is a guest post by Mitch Klee. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.