Understanding Bitcoin’s Volatility

Bitcoin is an open ledger that is audited and made available for the world to see every 10-minutes on average. Its openness and transparency gives us the ability to do on-chain analysis in a way that no other asset offers. In this regard, we can see the time stamp of each UTXO (unspent transaction output) that’s created. A UTXO can be looked at or interpreted as a little piece of Bitcoin left over after a transaction is executed. By having access to the timestamp of each UXTO that was ever created, we can calculate the holding time and therefore the age of all coins on the network. The HODL Wave metric was originally created by the team at Unchained Capital. It conveniently displays the age of all coins via a range of colored bands (see below).

There are two distinct things we can glean from looking at HODL Waves:

1. The longer a coin is held, the less likely it is to be spent (sold). As an example, coins that are held for more than 1-year rarely move. This is what is called or defined as “Illiquid Supply.”

2. When there are changes in the illiquid supply of coins held one year or more, it’s quite significant and special note should be taken. Heavy increases in this group can lead to supply squeezes that typically result in massive price advances. Heavy decreases in the 1-yr or more group often coincide with price tops and subsequent declines in price.

I prefer to focus on the 1-5 year HODL group as coins held longer than that are largely lost and coins held shorter than this time frame are owned by weak hands willing to sell for any reason. The 1-5 year HODL group are your true Bitcoiners. They’ve survived many ups and downs in price and they’ve heard all the FUD (fear, uncertainty, doubt) that’s often spewed by Bitcoin naysayers, yet they still hold on. They are true believers. As long as this group (the true believers) steadily grows in the face of a rising price, it’s evidence that the Bitcoin standard is being adopted more and more.

Bitcoin HODL Waves

This images shows HODL Waves from late 2018 to current. In late 2018 (far left), with Bitcoin’s USD price below $4,000, roughly 30% of all coins were held by true Bitcoiners, that 1-5 year HODL group. Today (far right), at $41,000, this same group represents roughly 36% of all coins owned. Despite a significant price increase for Bitcoin, the HODL rate amongst this all-important group has increased. This is extremely healthy for Bitcoin and bodes well for future advances in price.

Bitcoin’s Volatility Is a Feature, Not a Fault

One of the faults hurled at Bitcoin is that it’s too volatile to serve as a sound form of money. What many who subscribe to this fail to understand is that Bitcoin is truly not volatile in real terms. One Bitcoin is always one Bitcoin and one Bitcoin is always 100 million Satoshis. There is nothing volatile about this. In fact this very lack of elasticity is what makes it incapable of volatility. So if Bitcoin is truly not volatile, what gives off the impression that it is? It’s the U.S. dollar, which is in search of Bitcoin’s value, that is volatile. In certain moments the U.S. dollar regards the value of a single Bitcoin more and at other times, it regards its value as less. Sometimes your dollars buy more of the same Bitcoin. Sometimes your dollars buy less of the same Bitcoin. Bitcoin has nothing to do with this. It is stable, constant. This is the U.S. dollar’s affair, not Bitcoin’s.

With this being said, another one of the contributing factors to the apparent volatility of Bitcoin, is the HODL rate of the 1-10 year+ owners. As mentioned above, I believe a sizable portion of all coins which have not moved in 6 to 10 years are lost. This means looking at the activity of the 1-5 year HODLers is more informative. This group, as was pointed out, is currently 36% of all coins owned. Add this to the 6-10 year+ plus group of coins and you have a healthy chunk of the network being illiquid. Illiquidity always leads to volatility. Why? Because not a great deal of activity (buying or selling) is required to have a significant effect on price, when a market is highly illiquid.

Look at it this way: The fewer cars on a highway, the faster the cars present can run. The more cars on the highway, the slower the movement or traffic on the highway. Think of Bitcoin’s network like a highway. The removal of coins off the road or out of circulation makes movement in price easier, up and down. The more coins available to trade, the slower or harder it is to move price.

The Future of Bitcoin’s Volatility

It is my belief that Bitcoin’s volatility will wane over time. In fact, it’s already waning. In the year 2021, 36% of all stocks in the S&P 500 Index were more volatile than Bitcoin. In 2013, almost none of them were. Once Bitcoin gains more adoption, its volatility will greatly subside. Once this happens, Bitcoin will transition to the final stage of sound money by serving as the world’s unit of account. This is when all products and services will be measured or valued in Satoshis.

Today, Bitcoin has reached $1.2 trillion in value (at its high) with only 1.6% of the world having adopted it. Once Bitcoin has been adopted by 30% or more of the world’s population, it will no longer be volatile and will be able to take over the role of the world’s main unit of account.

That day is not today, but that day is sure to come.