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The Week On-chain (Week 24, 2021)
Price rallied twice this week, first after El Salvador voted in the legal tender bill, and then again on Sunday afternoon. During both of these swings, the value held in profitable UTXOs jumped by around 1.5M BTC. Between both of these upswings, the weekly low of $31.7k to Sunday's high of $39.2k, a total of 1.985M BTC returned to an unrealised profit.
Whilst some of these coins are likely to those purchased back in January (similar price range) and remain unspent, we can estimate that at least 1.985M BTC (~10.5% of circ. supply) has an on-chain cost basis between $31.7k and $39.2k.
We can reasonably assume that this newly profitable supply is broadly held by three different cohorts:
HODLers who purchased coins in early Jan 2021 and have not spent them. These coins are currently maturing across the 155-day Long-Term Holder (LTH) threshold.
New HODLers who are buying the dip in the current range and likely to hold throughout whatever volatility lies ahead (hard to isolate in the data for now).
Traders and Short-Term Holders (STH) who are trading price swings and are more likely to liquidate at price targets or in downside volatility. They are also more likely to utilise derivative markets and leverage.
The chart below shows the amount of STH held supply in profit (green) and the STH-SOPR as a metric for the degree of profit taking (pink). There are two key observations here:
Following each spike in STH profitable supply during price rallies (green 1, 2, 3, 4), the STH-SOPR spikes and holds an elevated level soon after (matching pink 1, 2, 3, 4). This indicates that some portion of this STH cohort are likely taking profits on swing trades or being shaken out by intra-day price volatility.
During the price rally after the vote in El Salvador, around 737k BTC owned by STHs returned to profit (representing around 37% of the 1.985M from the last chart). As such, we can estimate that around 63% of coins with a cost basis in this price range are actually LTH owned coins purchased in January 2021, and 37% are recently accumulated
Let's turn our attention now to the long-term holder (LTHs) cohort who include all buyers of coins prior to 10 January 2021. The LTH net position change shows the net monthly rate of coins maturing across the 155-day threshold, accounting for any coins spent.
The chart below is marked up with the price range from 155-days ago ($13k to $42k) mapped onto the accelerating rate of those coins maturing today. What this indicates is that a very large volume of coins were purchased in the early bull market, and have remained largely unspent. The current rate of maturation is over 400k BTC/month which is much larger than the ~160k BTC we estimated were sold, mostly by STHs, during the May capitulation event.
Some LTHs have and will take profits on their coins. What is common in all Bitcoin cycles is that LTHs spend a larger majority of their coins into the strength of bull rallies, and slow their spending on pull-backs as conviction returns. This behaviour can be seen in the LTH-SOPR which tracks the aggregate profit multiple realised by LTHs.
After peaking around 7.5x (LTHs realising 750% profits) in Mar-Apr, it can be seen that LTH's are realising declining profits during this price correction, even as price trades sideways. LTHs are currently realising profits with a multiple of 3.2x which suggests an aggregate cost basis of around $11.3k for their spent coins (7-day avg price $36.2k / 3.2 = $11.3k).
We inspect the Binary CDD metric with a 7-day moving average applied. The base Binary CDD metric will return a 1 or a 0 when the volume of coin-days destroyed is greater, or less than the long term average. With a moving average, we can see when trends develop of old coins being spent (uptrend/high values), or remaining dormant (downtrend/low values).
The Binary CDD metric has reached an extremely low value throughout June, coincident with the early 2020 start of the bullish trend. This indicates that Long term holders are simply not spending their coins.
Bitcoin is Key to an Abundant, Clean Energy Future
This week, Elizabeth Warren shared her opinion on crypto citing “cryptocurrencies like bitcoin are terrible for the environment”. While politicians not understanding much about crypto is not a new thing, energy usage has been controversial recently since Elon’s infamous tweet. To immediately squash the energy usage argument, you can bring up the statistic that seventy-six percent of Bitcoin mining is done with renewables. That is because Bitcoin actually incentivizes renewable energy which I will be explaining in this article. First, I want to explain a couple of concepts that are critical to understanding crypto energy usage. So to start off, let's talk about mining. Mining crypto can be done in two ways which are very different from each other. The first way is through a physical device such as an ASIC, graphic card, or even a CPU. These physical devices solve complex equations which are called proof of work functions. While proof of work is energy-intensive, it is well worth it because of the security it garners. Bitcoin is one of the most secure systems in the world for a number of reasons, one of which is the fact that invalid transactions cost energy to get submitted. The other way is proof of stake which does not require physical devices and uses significantly less energy. Popular cryptocurrencies such as Cardano, Binance Smart Chain, and Solana are all examples of proof of stake blockchains. While less energy usage could be considered a win, it makes it hypothetically less secure and doesn’t provide an incentive for renewable energy which I will begin to explain. Proof of work miners are unique energy buyers in that they offer highly flexible and easily interruptible load, provide a payout in a globally liquid cryptocurrency, and are completely location agnostic, requiring only an internet connection. These combined qualities constitute an extraordinary asset, an energy buyer of last resort that can be turned on or off at a moment’s notice anywhere in the world. This is really important for renewables like solar and wind which are now the least expensive form of renewable energy and most scalable. Solar and wind energy, however, both suffer from one major deficiency versus more expensive baseload power like natural gas or nuclear: intermittency. In the energy industry, this results in what is known as the “duck curve.” In essence, the sun shines during the day, but not at night. The wind is more unpredictable but tends to blow more heavily at night. Energy supply, therefore, is either abundant or nonexistent. Demand, however, peaks around the late afternoon or early evening when people arrive home and turn on appliances, at which time neither solar nor wind are abundantly available. The end result is significantly more power than society typically needs for a few hours per day and not nearly enough when demand spikes. This same challenge also plays out seasonally as the sun shines more during the summer and the wind blows more during the winter. Unfortunately, with the current battery technology, storing the energy for later use is not feasible nor is it cost-effective. So basically until there's a way to store energy effectively, that energy is wasted but that is where bitcoin comes in. The unlimited appetite of miners allows them to eat whatever remains of the excessive energy which can make renewable significantly more cost-effective as they can sell the Bitcoin that they mine. In my opinion, Bitcoin is key to making the amount of solar and wind energy on the grid increase dramatically. I didn’t have enough space but next week I will dive into how Bitcoin has allowed non-renewable energy to be used rather than wasted.
In a world first, El Salvador makes Bitcoin a legal tender
History has been made, as El Salvador becomes the first nation to adopt Bitcoin as a legal tender. El Salvador’s President, Nayib Bukele, believes that Bitcoin suits the country perfectly, as roughly 70% of the population does not have a bank account, and nearly 20% of their GDP comes from remittances. Therefore, Bitcoin will allow for easier, more efficient, and more accessible transactions to occur. With the passing of this bill, expect many more countries to follow suit.
To make matters even more interesting, Bukele has been in talks with a state-owned geothermal electric company, LaGeo, to develop an effective way to mine Bitcoin. They have proposed building mining facilities using “renewable energy from the country’s volcanoes.” These developments could very well make ripples in the world of crypto, while also drastically improving the economy of El Salvador if everything goes according to plan.
Ecoinometrics - Is there a weekend effect?
It is time for the alleged “weekend effect” rumor in the Bitcoin market to be put to rest. There has been an idea circulating around the crypto-community that Bitcoin tends to perform worse on Saturday and Sunday, but according to data pulled together by “Ecoinometrics”, this is simply a false claim. When focusing on the distribution of daily changes there was little to no variance between each day of the week. And to ensure that all interpretations of this concept were covered, they also constructed a graph detailing the volatility of Bitcoin from the day’s opening to the day’s closing, as opposed to a day-to-day comparison. If anything, Wednesday, Thursday, and Friday have greater outliers in terms of their daily change. It looks like the crypto-conspiracy theorists may have chalked up an “L” with this one...
Chart of the Week
Digital asset investment products saw a second consecutive week of outflows totalling $21m.
The outflows in Bitcoin cooled last week, totalling $10m, significantly less than the previous record week of $141m
Video of the Week
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Texas Blockchain’s ‘State of the Market’ is a student-led editorial. None of the views expressed by the authors should be taken as the view of the University of Texas at Austin or the Texas Blockchain organization. Furthermore, none of the views expressed should be taken as financial advice in any circumstance.