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Text | Overnight Porridge; Source | Babbitt Information Note: This article is a weekly on-chain data analysis report provided by blockchain data service provider glassnode. Analysts have judged through data such as changes in the balance of addresses across the entire network and reserve risk indicators that Bitcoin is currently in the second half or late stage of the bull market. Bitcoin prices continue to trade between $53,600 and $61,500 as traditional financial giants Morgan Stanley and Visa announce further adoption of Bitcoin. Morgan Stanley has launched three Bitcoin investment tools to serve high-net-worth clients and investment firms, while Visa follows Mastercard’s lead and will support the purchase of Bitcoin through the Visa network. It is clear that Bitcoin’s impact on global investors is becoming increasingly difficult to ignore.
Retail investors are accumulating Bitcoin Since March 2018, the number of addresses holding no more than 1 BTC has increased, and the percentage of BTC accumulated by these addresses has also increased. Three years ago, the number of BTC held by such addresses accounted for 3.97% of the total supply, and now accounts for 5.2%. The continued accumulation of retail investors indicates that participants have a strong willingness to HODL. Immediately after Black Thursday on March 12, 2020, we observed a significant increase in the number of addresses holding 0.1BTC-1 BTC. Although the total number of BTC in such addresses has dropped slightly after the Bitcoin price rose to $42,000, the current holdings have risen to an all-time high.
Whale BTC wallet addresses remain relatively unchanged Interestingly, while we continue to see retail investors accumulating BTC, the holdings of large wallets (>100 BTC) have remained relatively unchanged over the past three years. The chart below shows the Bitcoin supply held by addresses with balances of 100 BTC and above. These wallets currently hold 62.62% of the total BTC supply and have increased by 0.87% over the past 12 months.
The wallet balances of these large wallets have also been shuffled, which may be due to cold storage or custody arrangements. Since BTC broke through $20,000 in December 2020, we have seen roughly the same and opposite changes in the holder balances of large wallets: Octopuses and minnows (10 BTC-100 BTC) saw their Bitcoin holdings drop by 56,000 BTC. Dolphins and sharks (100 BTC - 1,000 BTC) increased their Bitcoin holdings by 331,000 BTC; Whales and humpbacks (1,000 BTC - 10,000 BTC) saw their Bitcoin holdings drop by 307,000 BTC; Looking at the net BTC held by these holders, we see a decrease of approximately 32k BTC, which is only 0.24% of the total amount of addresses in this category. At the same time, retail holders accumulated approximately 29,800 BTC during the same period, indicating that BTC wealth is gradually being transferred.
For more information on our estimated Bitcoin supply distribution and holder categories, see our blog post here.
The Reserve Risk Indicator is an advanced cyclical indicator that tracks the conviction of HODLers as we go through cycles. The general principles of the Reserve Risk Indicator are as follows: Every unspent coin accumulates coin days to measure how long it has been dormant, which is a good tool to measure the conviction of a HODLer. As the price of the coin rises, the motivation to sell and cash out these profits will also increase. Therefore, we usually see that as the bull market develops, HODLers will also sell some of their Bitcoin. More committed holders will resist the temptation to sell, and this collective action will form an "opportunity cost". Every day that HODLers actively decide not to sell will increase the accumulated unused "opportunity cost" (called the HODL bank). Reserve risk is the ratio between the current price (the incentive to sell) and the accumulated “opportunity cost” (the HODL bank). In other words, reserve risk compares the incentive to sell with the strength of the HODLer to resist the temptation. The table below shows the Reserve Risk Oscillator, whose current value is 0.008, while past cycle peaks usually occur when the value is greater than 0.02. As the price of the coin rises and more HODLers spend their Bitcoin, the risk of the reserve will increase. This represents a shift in BTC from long-term holders to new participants. For more information on reserve risk measurement, be sure to check out @hansthered’s original paper and our notes on Glassnode Academy.
We can also look at the relative proportion of supply owned by long-term holders (LTH, blue) and short-term holders (STH, red), and classify coins as profitable (dark) or losing (light) based on when they last moved. Note that the charts below show the proportion of circulating supply that is in profit or loss, not the size of PnL. Bull markets typically follow a similar "wealth transfer" path through three different phases. We can use these fractals to estimate where we are in this cycle and pair them with the Reserve Risk Indicator. Phase A - The most painful phase: This period is the worst phase of the bear market, and the largest cross-section of BTC holders is in a loss state (the thickest light-colored area). As can be seen from the gradually increasing light blue area, short-term holders began to accumulate Bitcoin around the halfway point of the bear market. During the capitulation phase, only 40%-45% of short-term coins are in profit, which represents the period of maximum pain, and these time periods have been the bottoms in all Bitcoin cycles to date.
Phase B: HODL reaches its peak. As the bull market progresses, higher prices will create greater temptation for HODLers to sell some of their coins. At some stage, we will reach the "HODL peak", which represents an inflection point. At this inflection point, most short-term holders are in a profitable state. Generally speaking, this corresponds to a breakthrough in the previous cycle's historical high price. With each new cycle, we have seen more supply flow to short-term holders, reflecting both market forces, increased conviction, the maturation of the asset class, available tools to access liquidity, and of course, exponential price appreciation and wealth creation. Peak HODL in 2011 = 55% of supply. 2013 Peak HODL = 65% of Supply (occurred 2 times) Peak potential HODL in 2021 = 75% of supply
Phase C: Cycle Top, as more short-term holders sell their coins after the HODL peak, the market eventually reaches an ecstatic top position. This represents a "wealth transfer" in Bitcoin from short-term holders to new speculators and reactivates dormant supply back into liquid supply. We can estimate the fraction of supply consumed by short-term holders during the last stretch of the bull run by taking the difference between the peak of HODL and the same metric measured at the top of high volume. This can be thought of as the reactivation supply required to create a top: 2011 Top: Short-term holders reactivated about 12% of supply; 2013 Top: At both peaks, short-term holders reactivated about 10% of supply. 2017 top: Short-term holders reactivated about 17% of supply; 2021: So far, short-term holders have reactivated approximately 9% of the supply;
Similar to the Reserve Risk Indicator, these studies suggest that the current bull run is in the second half or late stages of the cycle, with short-term holders having sold just 9% of supply since the (assumed) peak HODL point, still holding a large relative portion of supply. The 2017 peak was 17%, reflecting massive new interest and a growing audience. This BTC “wealth transfer” is another interesting fractal to watch as Bitcoin exposure and adoption continue to grow and the debate over super cycles continues. The accumulation of retail investors is not limited to Bitcoin holders. Since March 2020, Ethereum addresses with a balance of less than 10 ETH have accumulated an additional 1.41% of the circulating supply. These addresses currently hold 4.58% of the circulating supply of ETH and continue to trend upward.
We are also seeing more long-dormant ETH begin to wake up, and the chart below shows that the supply of ETH held for more than 6 months has been steadily declining since May 2020. In addition to some profit-taking, some of the supply may have been deployed to DeFi smart contracts or even Ethereum 2.0 staking contracts (which have been on a sharp downward trend since the end of 2020).
Meanwhile, the balance of ETH held in smart contracts officially surpassed the balance of centralized exchanges in September 2020. As of today, exchanges hold 12.94% of all ETH, while smart contracts currently hold more than 1/5 of all ETH (about 21.11%), indicating product market fit with the trend that began in 2020, when the hot DeFi has locked up a large amount of ETH supply.
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