This is opinion editor Shane Nagle, editor-in-chief of The Tokenist.
Macroeconomic headwinds continue to fuel bearish sentiment across all markets, including bitcoin.
As of October 2022, bitcoin is down more than 60% since the beginning of the year, but bitcoin trading volume has remained fairly stable since July 2022. Does this mean that the majority of owners have given up on the prospect of bitcoin and prefer to sell?
It’s a complicated subject to get into, but behind the noise there’s an indicator that can help paint a picture of what’s going on: coin days destroyed (CDD).
What is destroyed by coin days?
Throughout the asset’s trading history, there is a significant difference if the purchase price is at the lower or higher end of the price spectrum. In the case of Bitcoin, this spectrum is relatively short – only 13 years – but it is quite volatile in terms of price (ranging from $0-$69,000). The original cryptocurrency went through four major bull and bear periods, but continued to trend upward as it grew.
The meaning of this long-term, upward trajectory is clear. Investors who buy bitcoin early gain the most by selling it, even in bear markets. Likewise, investors who took the opportunity to buy bitcoin early and at a lower price were able to buy more bitcoin for the same amount of fiat currency compared to prices later in bitcoin’s history.
In turn, a previously mined and purchased bitcoin has a different value than newly released bitcoin. If these “old” bitcoins are held in the same wallet for a long time, such chain activity would represent a strong belief of the owner in the long-term value proposition of bitcoin. Such activity sends a strong signal to the Bitcoin network.
In addition, the long-term holder of a dormant bitcoin is more likely to experience several months and a bull market cycle, which further increases the importance of the movement of the old bitcoin.
The metric of destroyed coin days measures this importance. According to Glassnode, “Destroyed coin days are a measure of economic activity that gives more weight to coins that have not been spent for a long time.” CDD is calculated by multiplying the number of coins in a given transaction by the number of days since the last move from the wallet.
Bitcoin is often criticized for its high level of volatility. However, even in traditional IRAs, there is clear demand for bitcoin in long-term investments. CDD is a popular on-chain indicator used to measure the sentiment maintained by long-term holders – individuals who see value in the long-term prospects of bitcoin.
So what does the current level of CDD offer?
Bitcoin’s CDD Is Very Low
At 0.36 in October 2022, the 90-day moving average of the CDD of bitcoin hit one of the lowest values in its entire history. This particular range was previously visited only in late 2018, 2015 and 2011. As the supply-adjusted bitcoin destroyed days (BDD) chart below shows, the highest BDD gains occurred during bull run peaks, which were expected as long-term holders. they close their profits.
In other words, long-term bitcoins—in the context of the asset’s historical sales activity—continue to hold large numbers of bitcoins. This may be one of the reasons why bitcoin’s price activity is relatively stable. Such owners can act as a buffer against selling pressure.
If we turn to bitcoin trading volume, do we see a similar pattern?
The chart above shows the trading volume of bitcoin from October 2020 to October 2022. What is mentioned here is fairly stable and consistent trading volume from around July 2021 to October 2022. We do not see a similar reduction in activity from CDD.
The combination of the data from these two indicators – low CDD with stable and consistent trading volume – further suggests that the majority of bitcoin traded is by short-term holders. In fact, 2010/2011 bitcoins were bought for less than $100.
Overall, just over 60% of BTC in circulation has not been moved in over a year, according to Glassnode data. This holding trend has also contributed to bitcoin’s extremely low volatility. In comparison, similar price volatility in 2018 saw a 50% drop in one month, falling from $6,408 in November to $3,193 in December.
Even if long-term bitcoiners hold the line, are we likely to see a new bottom?
Additional Bitcoin Selling Pressure
Currently, the price of bitcoin is inversely related to its record high hash rate. This is not good news considering that miners have to sell their mined bitcoin to service their debts.
Already, one of the largest bitcoin mining companies, Core Scientific (CORZ), is investigating bankruptcy with a hash rate of about 5% of the network’s total volume. Meanwhile, CORZ shares have lost 98.32% for the year.
Argo Blockchain (ARBK) shares the same fate, down 91.56%, unable to sell enough assets to cover costs. According to an operational update from Argo in October 2022:
“If Argo is unable to complete any additional financing, Argo will be cash flow negative in the near term and will have to curtail or cease operations.”
Although these mining companies may reduce bitcoin hash difficulty, it could lead to another contagion spiral in the game of survival of the fittest. This time, weakness and market sell-offs may come from the remaining centralized platforms that lend dollars to bitcoin mining companies. Returning to the ongoing macroeconomic headwinds, how the market interprets the Federal Reserve’s next steps could boost bitcoin’s price enough to keep miners afloat.
As the Fed raises the cost of capital and borrowing, it strengthens the dollar in the process, which typically forces investors to abandon risky assets like bitcoin. When investors predict a recession, the dollar gets stronger as investors dive into cash as a safe haven.
Likewise, the Fed’s signal against accelerated tightening—a departure from its expected growth schedule—could provide market comfort.
However, the so-called “Fed pivot” should not be understood as a return to low interest rates, but as a slowdown in growth, potentially only 50 basis points in December (if incoming inflation data favors it). Nevertheless, in the current fearful market environment, this may be enough to avoid a short-term rally or at least a new bitcoin bottom.
Despite many factors driving investors away from risky assets – the Fed’s 40-year high inflation, the looming energy crisis in Europe, ongoing global supply chain problems, and even Bitcoin’s mining difficulty – data from CDD and bitcoin trading volumes provide us with an interesting observation. Long-term holders seem more confident than ever in the long-term value proposition that bitcoin provides. Such owners are currently selling bitcoin at one of the lowest prices we’ve seen in the history of the Bitcoin network.
This is a guest post by Shane Neagle. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.