One year until the bitcoin halving: analyzing holder dynamics

LONG-TERM HOLDER DYNAMICS

Our primary thesis is that the halving leads to a demand-driven event in bitcoin, as market participants become acutely aware of bitcoin’s absolute digital scarcity. This leads to a rapid phase of exchange rate appreciation. This hypothesis is somewhat divergent from the main narrative, which is that a supply-driven event instigates the exponential increase in price because miners earn fewer bitcoin for the same amount of energy expended and put less selling pressure on the market.

When we look closely at the data, we can see that the supply shock is often already in place — the HODL army has already staked their ground, if you will. On the margin, the reduction of supply hitting the market does make a material difference in the daily market clearing rate, but the increase in price is due to a demand-driven phenomenon that hits an entirely illiquid supply on the sell side with holders who are forged in the depths of the bear market unwilling to part with their bitcoin until price appreciates by approximately an order of magnitude.

Statistically speaking, long-term holders are the least likely to sell their bitcoin and the current supply is held tightly by this cohort. The people who were buying and holding bitcoin while the exchange rate was down approximately 80% are now the dominant majority share of the free float supply.

The halving reinforces the reality of Bitcoin’s supply inelasticity to changing demand. As education and understanding about bitcoin’s superior monetary properties further perpetuate across the world, there will be an influx of demand while its inelastic supply makes the price rise exponentially. It isn’t until a large share of the convicted holders part with a proportion of their previously dormant stash that the exchange rate crashes from a feverish high.

These holding and spending patterns are very well quantifiable, with an entirely transparent and immutable ledger to document it all.

We know that the long-term holders are the ones setting the floor in the bear market, but they are also the ones setting tops in bull markets. Many people look to the halving’s supply shock as what drives the increase in price, with miners earning fewer coins while still needing to sell some in order to pay their bills that have remained the same cost in dollar terms (or the local currency terms). We can observe miners’ net position change overlaid with the bitcoin price and see the impact of their accumulation and selling.

There is clearly a relationship between the bitcoin price and whether miners are accumulating or selling, but correlation does not equal causation and when we include the behavior of long-term holders, we can see how much larger the tide of holder accumulation and distribution is compared to miner sell pressure. The chart below shows the same miner net position change as above, but overlays it with long-term holder net position change, both measuring the net accumulation and distribution of the two cohorts over a 30-day period, displayed on the same y-axis. When we compare the two, it is difficult to see the miner net position change (red) in relation to the much more prominent position change of long-term holders (blue). While miner sell pressure receives all of the press, the real driver of the bitcoin cycle is the convicted holders, who set the floor with accumulation, compressing the proverbial spring for the next wave of incoming demand.

Long-term holders tend to distribute their coins as bitcoin makes its parabolic rise and then begin reaccumulating after the price corrects. We can look at long-term holder spending habits to see how the change in long-term holder supply is what ultimately helps the price cool off after a parabolic rise.

On-chain data shows that coins that haven’t moved for over six months currently have an average spend price that stays relatively flat during the entirety of the bear market — compared to the volatility of the market-to-market exchange rate. What occurs during the bear market is simply a reshuffling of the deck: UTXOs are exchanging hands from the speculator to the convicted, from the overleveraged to the ones who have free cash flow.

During periods of market frenzy to the upside, the outflow of coins from long-term holders is much larger than the sum of daily issuance, while the opposite can be true in the depths of the bear — holders are absorbing far greater amounts of coins than the sum of new issuance.