by Dan Clarke & Jesse Knutson, Institutional Sales
DISCLAIMER; This post and its contents should in no way be considered investment advice.
I worked as an equity sales-trader for almost 20 years. What does a sales-trader do? Very simply buy & sell equities on behalf of their institutional clients. It’s not rocket science but in hindsight was great training for crypto. After years looking at charts, macro & micro data sets, fundamentals & everything else in between you come to a realisation that when it comes to predicting the future direction of a tradable asset, nothing works forever & there are no consistently magic tools.
Each technical indicator, macro indicator, flow indicator works until it doesn’t. The more tools you have in the tool box the better, but being able to formulate a narrative of why certain tools are working at certain times is the key & always remaining cognisant of the fact that even when a narrative may be working, it doesn’t necessarily mean its the right narrative. So now to take a look at a Bitcoin data set that I think right now needs to be in everyones tool box.
Bitcoin UTXO Data
Back in April I came across a medium post by Physicist turned serial entrepreneur Dhruv Bansal , Co-founder of Unchained Capital where he introduces the idea of analysing Bitcoin UTXO data. I have spent hours looking at this data & each time I come back to it I discover something new. I am not claiming this data set doesn’t have any drawbacks but I will leave that for data scientists.
The idea behind this data is that a certain % of Bitcoins are bought and held for the long term (3–5Yrs. The “HODLERS”), whilst a certain % is changing hands frequently (Traders/Transactions etc). This is true to some degree in most asset classes however Bitcoin’s unique structure allows this to be visualised in real time (See below).
In more recent bubbles, Bitcoin is accompanied by a series of spikes in the % of Bitcoins that were last used in a transaction over shorter term periods, represented by the growth in warmer colour bands (The red arrows highlight the spikes. I think of this like a growth in churn of Bitcoins).
At Bitcoin price peaks we tend to see a fall in the % of coins that were last used in transactions over the longer term periods represented by the contraction of the colder colours (“HODLERS” taking profit) coupled with a peak in % of Bitcoins last used in transactions over short time frames represented by the warmer colours (New speculators buying off the “HODLERS”).
From peaks into troughs we see the inverse, with slow growth in % of coins that were last used in transactions over the longer term periods (New “HODLERS”) & a contraction in the % of Bitcoins that were last used in a transaction over shorter term periods (Decline in churn as falling price leads to reduce speculative activity).
In addition, over time the % of coins that are held for 3–5Yrs appears to be growing which I assume is a sign that as Bitcoin continues to thrive & flourish, more people believe in the longer term value proposition. In theory as the % of supply locked up for longer periods continues to grow, this coupled with the exponential growth rates in users helps to drive the asymmetry of returns.
The reason I am coming back to this data today is due to a Bloomberg article on Oct 31st with the headline as below:
I have only followed crypto since 2015 so I can’t claim to be an expert, but I can’t help but think that for 99% of people reading that headline it was meaningless. Is 1 in 4 a good thing, a bad thing or just a useless data point? 30 seconds into the article it quotes Nic Carter from Coin Metrics “It tells me we are still in a Bitcoin recession”. Whilst the quote was probably taken out of context, telling me that this data point confirms we are in a Bitcoin recession after a 60%~ fall is like telling me it’s summer in July.
The problem with this isn’t Nic & Coin Metrics, because for anyone reading on you realise they know their stuff & have some good insight. The problem is that most people wouldn’t get past the title and for those that did they would probably have switched off after telling the reader they were in a Bitcoin recession. I actually feel sorry for Nic that his work is presented to such a wide audience in this way.
Only 25% of Bitcoins Moved Between Addresses in Past Six Months May Signal a Bottom
This is the headline as I would like to have seen it. Maybe because it could be deemed as pushing the bull case for crypto they wanted to avoid taking a line? Anyway the below chart comes directly from Unchained Capital and can be found here. I have added a few annotations to highlight a couple of useful points.
The horizontal blue line is set at approximately 23%~ (% of Bitcoins moving between addresses in past 6months) which was a level that coincided with a period just prior to the Bitcoin bull run that commenced after the 2014–2015 bear market (Where the horizontal & vertical blue lines cross “BUY 1”). As the Bloomberg article states, the current reading is near 25%~ & very close to the level that signalled a buy in 2015. So whilst on its own this doesn’t confirm the bottom is in, it is another tool in the box that is currently more bullish than bearish when comparing data points to the previous cycle.
This same indicator was also very useful in timing the peaks of the 2014 & 2017 bull markets. In both cases once the % of Bitcoins moving between addresses in past 6months entered the 45–50%~ range, the market was very close to the peak. Once again the timing is not exact, but it is close & more reliable as an indicator than many being thrown around in Q4 of 2017.
By comparing the last 2 cycle peaks & troughs its clear that right now there is a meaningful pattern, although we need to wait & see if this remains a good trough indicator in this cycle. Like all patterns they work until they don’t but for now, this is an indicator I will be watching very closely.
DISCLAIMER; This post and its contents should in no way be considered investment advice. We may individually hold positions in some of the assets we discuss. Any projections, conclusions, analysis, views are to be considered hypothetical & for informational purposes only & not meant as recommendations for investment. Anyone considering an investment in crypto should only invest what they can afford to lose. You alone are responsible for evaluating the risks & merits of our content.
