The Week On-chain (Week 12, 2021)

Bitcoin consolidates above $53.6k as on-chain metrics suggest conditions are similar to the second half or later stages of a bull market.

The Week On-chain (Week 12, 2021)

Bitcoin Market Overview

The Bitcoin market has continued to consolidate between $53.6k and $61.5k as announcements of further Bitcoin adoption come out from traditional finance giants Morgan Stanley and Visa. Morgan Stanley has launched access to three bitcoin investment vehicles, available their for high net worth clients and investment firms. Visa has also followed the Mastercard lead in the path to enabling bitcoin purchases via the Visa network.

Bitcoin becomes harder to ignore at an increasing rate.

'Stacking Sats'

Since March 2018, bitcoin addresses holding 1 BTC or less have continued to accumulate their share of the BTC supply. Three years ago, 'sat stackers' held 3.97% of the supply and have since accumulated an additional 1.23%. This brings their current ownership share up to 5.20% of all mined BTC.

The persistent accumulation of small holders demonstrates a willingness to HODL through volatility with the trend unbroken from mid 2018 through the chaos of 2020. We also see a large swelling of 0.1 to 1 BTC holders immediately following the March 2020 Black Thursday sell-off.

Despite a small degree of spending in the rally up to $42k, 'sat stackers' are back at an all-time-high of holdings.

Relative Address Supply Distribution Live Chart

Whale Wallets Comparatively Flat

Interestingly, whilst we have continued to see small holder accumulation, larger wallet holdings (>100BTC) are relatively flat on net over the past three years. The chart below shows supply held by addresses with 100 BTC or more. In total, this group currently hold 62.62% of the BTC supply and have increased their total stake by 0.87% over the past 12 months.

Relative Address Supply Distribution Live Chart

These larger wallet balances have also shuffled around denominations, potentially as part of cold storage or custodian holding arrangements. Since approaching last cycle's $20k ATH in December 2020, we see approximately equal and opposite changes in larger holder balances:

  • Octopus to Fish (10 to 100 BTC) have decreased holdings by -56k BTC
  • Dolphin to Shark (100 to 1k BTC) have increased holdings by +331k BTC
  • Whale to Humpback (1k to 10k BTC) have decreased holdings by -307k BTC
  • On net across these cohorts, we have seen a slight decrease of -32k BTC representing only 0.24% of the total supply held by this cohort.
  • Meanwhile our 'sat stackers' have accumulated +29.8k BTC in this same time demonstrating a gradual transfer of BTC wealth.
Supply Held by Addresses Comparison Live Chart

For more information on our estimated Bitcoin supply distribution and holder categories, please see our blog post here.

HODLer Cyclical Behaviour

The Reserve Risk metric is an advanced cyclical indicator which tracks the conviction of HODLers as we move through cycles. The general principles that underpin Reserve Risk are as follows:

  • Every coin that is not spent accumulates coin-days which measure how long it has been dormant. This is good tool for measuring the conviction of strong hand HODLers.
  • As price increases, the incentive to sell and realise these profits also increases. As a result, we typically see HODLers spending their coins as Bull Markets progress.
  • Stronger hands will resist the temptation to sell and this collective action builds up an 'opportunity cost'. Every day HODLers actively decide NOT to sell increases the cumulative unspent 'opportunity cost' (called the HODL bank).
  • Reserve Risk takes the ratio between the current price (incentive to sell) and this cumulative 'opportunity cost' (HODL bank). In other words, Reserve Risk compares the incentive to sell, to the strength of HODLers who have resisted the temptation.

The chart below presents the Reserve Risk oscillator which is currently at a value of 0.008 with previous periods higher than this highlighted blue. Past cycle tops have typically occurred at values greater than 0.02.

As price increases and/or more HODLers spend their coins, Reserve Risk will increase. This represents a BTC 'wealth transfer' from long-term holders to new buyers.

For more information on the Reserve Risk metric, be sure to check out the original paper by @hansthered and our notes on Glassnode Academy.

Reserve Risk Live Chart

Bitcoin Wealth Transfer

We can also look at the relative proportion of supply owned by Long-term Holders (LTH, Blue), Short-term Holders (STH, Red); and classify coins as in profit (dark colour) or at a loss (light colour) depending on when they were last moved. Note that the following charts present the proportion of circulating supply which are in profit or loss, not the magnitude of the PnL.

Bull markets generally follow a similar 'wealth transfer' path over three distinct phases. We can use these fractals to estimate where we are in this cycle as a companion to the Reserve Risk metric.

Phase A - Max Pain: In the depths of the bear market, the maximum cross section of BTC holders are at a loss (thickest light colour areas). LTHs start accumulating (at immediate loss) around halfway into the bear as shown by the increasing light blue areas.

At the point of capitulation only 40% to 45% of LTH coins are in profit which represents maximum pain and has put the bottom in for all cycles so far.

Long- and Short-Term Holder Supply in Profit/Loss Live Chart

Phase B - Peak HODL: As the bull market progresses, higher prices create larger temptations for HODLers to spend coins. At some stage we hit 'Peak HODL', an inflection point where the largest proportion of LTH owned coins are in profit. Generally, this corresponds with breaking the previous cycle ATH.

After Peak HODL we see profits taken at a faster rate than new HODLers coming in.

With each new cycle, we have seen more supply get locked up by LTHs. This is a reflection of both market strength, improved conviction, maturation of the asset class, available tools to access liquidity, and of course, exponential price increases and wealth generation.

  • 2011 Peak HODL = 55% of supply.
  • 2013 Peak HODL = 65% of supply (twice).
  • 2021 potential Peak HODL = 75% of supply.
Long- and Short-Term Holder Supply in Profit/Loss Live Chart

Phase C - Cycle Tops: Eventually, the market reaches a euphoric top which comes as more LTHs spend their coins following the Peak HODL inflection point. This represents a BTC 'wealth transfer' event from LTHs to newer speculators, and the re-activation of dormant supply back into liquid circulation.

We can estimate the proportion of supply that is spent by LTHs during this final leg of the bull market by taking the difference between Peak HODL, and the same metric measured at the blow-off top.

This may be viewed as the amount of re-activated supply needed to 'put the top in':

  • 2011 Top: LTHs re-activated ~12% of supply.
  • 2013 Tops: LTHs re-activated ~10% of supply for both peaks.
  • 2017 Top: LTHs re-activated ~17% of supply.
  • 2021 Current: LTHs have re-activated 9% of supply so far.
Long- and Short-Term Holder Supply in Profit/Loss Live Chart

Similar to the Reserve Risk metric, these studies suggest conditions are similar to the second half or later stages of a bull market. There remains a larger relative portion of supply still held by LTHs having only spent 9% since the assumed Peak HODL point.

The 2017 peak had almost double the amount of spent supply (17%) before the 'top was put in', a reflection of massive new interest and increased audience. This BTC 'wealth transfer' is yet another interesting fractal to keep an eye on as Bitcoin exposure and adoption continues to grow and the debate of super-cycles continues.

Weekly Feature: Ethereum Supply Dynamics

Accumulation by smaller holders is not limited to Bitcoiners. Since March 2020, smaller Ethereum holders with balances < 10 ETH have accumulated an additional +1.41% of circulating supply. These Gwei Gatherers currently hold 4.58% of supply with trend continuing up and to the right.

Ethereum Relative Address Supply Distribution Live Chart

We are also seeing more long dormant ETH supply being spent in the HODL Waves. This chart shows that the volume of ETH supply older than 6 months has been in steady decline since May 2020. It is possible that along-side some profit taking, some supply may have been deployed into DeFi smart contracts or even the Ethereum 2.0 staking contract (noting large drop starting late 2020)

Ethereum HODL Waves Live Chart

Meanwhile, the balance held in smart contracts officially flipped the balance on centralised exchanges in September 2020. As of today, exchange balances hold 12.94% of ETH whilst smart contracts now hold over one fifth of the supply at 21.11%. This demonstrates a clear product market fit as the trend started in 2020 'DeFi Summer' has continued to lock up ETH supply ever since.

Smart Contract and Exchange Balance Comparison Chart

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Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.