Groundswell Building — Bitcoin HODL metrics update April 2022
The first section provides background on the HODL metrics, the second section provides detailed insight on the state of the market from a HODL perspective and what our expectations are.
The key thesis underpinning HODL metrics is that the best indicator of on-chain health is continued ownership of bitcoin. The confidence in Bitcoin’s future governs the holding of the asset and hence there is a direct correlation between length of holding and Bitcoin’s health.
Glassnode supports this thesis with their focus on Long- and Short-term holder metrics. (https://insights.glassnode.com/follow-the-smart-money/). This however introduces a binary ownership classification where more nuance could unearth new insights into investor behavior.
The data foundation for the HODL analysis contained in this article is the detailed mapping of the daily flow of coins into and out of age bands published on Glassnode.
By tracking the in- and out- flows from each age band through maturing and spending we can derive new metrics not yet available in the public domain.
With the daily flow we can accurately model survival rates at the daily level. If 1,000 bitcoin age into the 6–12month age band we can see to the day how many age into the 1–2year age band exactly 6 months later. Any delta in the quantity has clearly been spent in the meantime. The remainder serves to calculate the survival rate (%). The higher the survival rate, the higher the confidence in the network and future price appreciation. As the survival rate can fluctuate wildly from day to day a 30-day moving average is used to smooth the numbers.
The survival rate has been rising in the last few years, and it is highest during market lows as more investors hold out for higher prices. As price rises the price elasticity of supply kicks into gear and highly profitable coin is moved to be sold.
The 1 year HODL ratio -the ratio of coins older than 1 year- has long served as a key metric to understand the state of the market with a strong decline associated with a bull run and strong growth associated with bear markets.
The daily flow insight combined with the survival rate allows us to model a 1 year HODL forecast, ie a projection of the percentage of coins that are older than 1 year.
The forecast is simply a maturing of what is currently in the Bitcoin age ‘pipeline’, corrected for the latest survival rate, calculated on a daily basis. It models supply situations 11 months into the future by adding to the current 1year HODL % the expected aging of the 1–3month, 3–6month and 6–12month age band available supply.
The HODL forecast models expected relative supply shocks and supply excess into the future. It is not precise in it’s estimation and generally overestimates the 1yr HODL expected, but it does project periods where there is relative supply constraint or excess. If many coins are in the funnel maturing and the survival rates are high, one can conclude a supply shock is building. Price generally follows.
The HODL forecast generally overestimates because the price development during a bull run changes the migration flows through significant spending. In other words, the survival rate drops drastically during bull runs as coins are spent, both from the funnel (1–12month age bands), as well as from HODLd coins older than 1 year.
If we assume the price elasticity of supply (see article) is a valid theorem for Bitcoin, we can assume that supply rises with price, and hence any supply constraints will cause the price to rise and coins to be released into available supply, thereby reducing the HODL ratio.
The only time the actual HODL ratio and HODL ratio forecast are more or less equal is at the start of a bull run. These are the moments when fear in the market is high but present the best time to buy.
Where is the market at right now, early April 2022?
By all indications the market is very healthy and bullish for the short- to mid-term.
- The survival rate of the key 6–12month age band remains high and has been at historically high levels for over 4 months now. This contributes to a building supply shock.
2. The cumulative weighted survival rate is historically high and with inflation rates 4x lower than a previous high in 2015 the overall supply state of the market can be characterized as significantly constrained.
3. The HODL forecast 11 months out remains high, and in fact touched an all-time high recently at 84%. This means any capital inflow is tapping into a limited pool of available inventory. Only price rising will unlock available supply.
4. The buy/HODL indicator remains firmly in the buy zone, despite the price rise in the last month.
Bitcoin is currently a strong buy.
We comment on price development given the current market situation and metrics against the historical record. However, macro and regulatory factors and events are unknown and may heavily impact Bitcoin’s price in the short- to mid- term. All that said, from a supply perspective inventory constraints are building that in the past have led to price appreciation. This alone is ample reason for a bullish attitude.
Price appreciation should continue and accelerate over the summer leading into August. It remains to be seen when a price peak will develop. Depending on the magnitude of the bull run the supply constraints will persist for the foreseeable future until the end of the year.
Updates will follow on a monthly basis.
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