The HODL Model: Bitcoin Illiquid Supply Is Outpacing Issuance

The penning of this nonfiction was supplemented by Sam Rule.

Abstract

The “HODL exemplary hypothesis” is that bitcoin has crossed a historical inflection constituent wherever the asset’s illiquid proviso is outpacing the complaint of caller proviso issuance. Future halvings with little proviso issuance volition lone exacerbate this divergence.

Illiquid proviso arsenic a percent of circulating proviso volition turn successful a parabolic manner arsenic bitcoin’s integer scarcity drives capitalist behaviour towards store of worth arsenic the ascendant usage case. As a result, illiquid proviso volition attack 80% of circulating proviso by 2036.

Disclaimer: This is simply a marketplace proposal and not concern advice; it should not beryllium treated arsenic such.

What Is Illiquid Supply?

It’s indispensable to recognize the liquidity illustration of bitcoin’s circulating supply. Quantifying proviso crossed antithetic levels of liquidity helps america amended recognize marketplace proviso dynamics, capitalist sentiment and bitcoin’s terms trajectory.

Liquidity is quantified arsenic the grade to which an entity spends their bitcoin. A HODLer that ne'er sells has a liquidity worth of 0 whereas idiosyncratic who buys and sells bitcoin each the clip has a worth of 1. With this quantification, circulating proviso tin beryllium breached down into 3 categories: highly liquid, liquid and illiquid supply.

Illiquid proviso is defined arsenic entities that clasp implicit 75% of the bitcoin they instrumentality in. Highly-liquid proviso is defined arsenic entities that clasp little than 25%. Liquid proviso is successful between.

This illiquid proviso quantification and analysis[1] was developed by Rafael Schultze-Kraft, cofounder and CTO of Glassnode.

The beneath illustration shows the past of illiquid proviso and circulating proviso maturation highlighting the mean bitcoin added per time crossed each halving cycle. Since the 3rd halving, illiquid proviso maturation has been outpacing circulating proviso maturation for the archetypal clip successful bitcoin’s history, adding 1,694 bitcoin per time compared to 902 bitcoin per day. Illiquid proviso bitcoin per time maturation has accelerated 61.48% into this 3rd halving epoch comparative to the 2nd halving, reversing a historical macro inclination of decelerating, affirmative illiquid proviso growth. 

Illiquid Supply As A Percentage Of Total Supply

At the clip of writing, illiquid proviso accounts for 76.22% of each circulating proviso totalling 14,452,208 bitcoin. This is the highest illiquid proviso percent of circulating proviso since December 2017. After reaching a bottommost successful July 2019, bitcoin’s illiquid proviso stock has grown from 71.47%.

Even during bitcoin’s convulsive liquidations cascade and its 53.98% July 2021 drawdown from astir $64,000 to beneath $30,000, illiquid proviso stock lone fell to 74.49% from 76.01%. Over time, much of the circulating proviso is uncovering its mode into illiquid proviso hands, i.e., investors who person shown that they are improbable to portion with the bulk of their bitcoin. 

HODL Model

There’s been small enactment done to exemplary retired what the aboriginal marketplace impacts of a increasing illiquid proviso stock of circulating proviso whitethorn look like. The HODL exemplary aims to bash this utilizing a logarithmic equation, giving america an inflection constituent wherever illiquid proviso maturation began to outpace caller issuance growth. The equation is defined below:

The exemplary results and illustration beneath amusement what the aboriginal whitethorn look similar if we’re to spot the illiquid proviso percent proceed this trend. The model’s inflection constituent occurs astatine the 3rd halving, which nears the historical debased successful the illiquid proviso percent of circulating supply. Post this inflection point, the HODL exemplary takes a blimpish attack to task illiquid proviso maturation and aims to enactment arsenic a level model.

By the adjacent (or fourth) halving successful 2024, the illiquid proviso “floor” percent volition beryllium 72.5% oregon 14.3 cardinal bitcoin. By the sixth halving successful 2032, illiquid proviso “floor” percent volition beryllium 77.5% oregon 16 cardinal bitcoin.

The Case For An Inflection Point

As bitcoin’s artifact reward volition autumn from the existent 6.25 BTC per artifact to 3.125 BTC and 1.5625 BTC implicit the adjacent 2 halvings, determination volition beryllium a important simplification successful caller proviso issuance. Approximately 164,000 caller bitcoin volition beryllium issued per twelvemonth during our 4th halving period, and astir 82,000 volition beryllium issued per twelvemonth during our fifth. This volition effect successful astir 984,000 BTC caller proviso issued implicit the adjacent 2 halvings (roughly 8 years).

In 2021, illiquid proviso accrued by 366,060 BTC. In 2020, it accrued by 837,430 BTC and 588,412 successful 2019. This is calculated utilizing the quality successful illiquid proviso connected December 31 of each twelvemonth compared to the anterior year. We would person to acquisition a large marketplace behavioral displacement to spot illiquid proviso autumn beneath the declining caller proviso issuance implicit the adjacent decade. This benignant of displacement would invalidate the model.

A cardinal crushed for utilizing the inflection constituent to exemplary HODL behaviour is due to the fact that of the historical, exponential maturation seen successful semipermanent holder supply. Although semipermanent holder proviso fluctuates importantly during cyclical tops and bottoms, the macro inclination of increasing semipermanent holder proviso is evident implicit bitcoin’s lifetime.

After a coin has sat for 155 days oregon astir 5 months, it becomes statistically improbable to beryllium spent based connected erstwhile Glasssnode short- and semipermanent holder analysis[2]. This sets the threshold for semipermanent holder proviso which has important crossover with illiquid proviso arsenic some seizure bitcoin HODLer behavior.

The illustration beneath shows the gait astatine which caller proviso enters circulation (through the artifact reward) and the gait astatine which circulating proviso becomes semipermanent holder and/or illiquid supply. The highlighted orangish container seems to people a bottommost of a 10-year downtrend. While we cognize caller proviso entering circulation volition proceed to further decrease, a divergence looks to look astatine the inflection point.

Will Illiquid Supply Approach 100%?

With Bitcoin’s superior usage lawsuit being a store of worth and the hard headdress of 21 million, 1 could presume that illiquid proviso volition inclination towards 100%. The HODL exemplary projects that the full proviso of bitcoin volition go illiquid by 2088 (the HODL exemplary extremity point), but this is unrealistic arsenic the 21 cardinal bitcoin proviso hard headdress volition beryllium approached but ne'er reached. By the seventh halving successful 2036, the HODL exemplary projects illiquid proviso to scope 80%. The HODL exemplary aims to beryllium conserative successful its estimates of illiquid proviso stock growth.

The exemplary does not marque immoderate assumptions connected important marketplace behavioral changes oregon aboriginal inflection points successful declining illiquid supply. As illiquid proviso approaches 100% stock of circulating supply, we don’t cognize what downward pressures whitethorn reverse this inclination of illiquid proviso growth.

One imaginable downward unit is the maturation of bitcoin’s usage lawsuit arsenic a mean of exchange, which could summation bitcoin’s proviso liquidity profile. Likely a crushed for a structural alteration successful illiquid proviso maturation (or 2nd inflection point) is simply a alteration successful request aft hyperbitcoinization, erstwhile bitcoin absorbs astir worth successful the world.

That said, illiquid proviso tin turn indefinitely arsenic bitcoin is infinitely divisible. The Lightning Network allows for milli-satoshis to beryllium sent portion the smallest portion on-chain is lone a satoshi. Even with dividing the proviso that tin beryllium utilized for much liquid usage cases down into smaller units, it’s inactive apt we spot a imaginable 2nd inflection constituent wherever illiquid proviso maturation slows down.

HODL Model Impact

As illiquid proviso rises, truthful bash the marketplace impacts of bitcoin’s integer scarcity. Liquid and highly-liquid proviso volition tighten arsenic illiquid proviso grows, leaving little bitcoin disposable connected the marketplace to get oregon trade.

New waves of request that participate the marketplace to get this declining disposable proviso volition past pb to exponential terms increases. Exponential terms increases volition incentivize that immoderate illiquid proviso modulation to liquid and highly-liquid proviso arsenic HODLers instrumentality profit, but this interaction volition beryllium negligible comparative to the wide interaction of illiquid proviso maturation during bitcoin’s monetization phase.

This tin beryllium seen by looking astatine important profit-taking periods successful bitcoin’s past wherever illiquid proviso had fluctuations but continued to turn emphasizing investors' wide semipermanent penchant and presumption of the asset. The short-term diminution successful the illiquid proviso stock during July 2021, earlier resuming its upward trajectory, is 1 of those periods.

The HODL Price Model

The HODL exemplary predicts a blimpish estimation of bitcoin’s disposable proviso wherever illiquid proviso follows the maturation curve we saw above. Since illiquid proviso stock nears a debased astatine the inflection point, a logical effect would beryllium for bitcoin terms to travel an inverse s-curve pattern.

With tighter liquid and highly-liquid supply, we spot precocious increases successful terms astatine the opening of bitcoin’s beingness and past mean terms increases adjacent the 3rd halving’s inflection point. As disposable proviso tightens again, we should expect higher terms increases to follow.

To exemplary this behaviour we tin usage an exponential inverse hyperbolic[3] tangent model.

Wicked Smart Bitcoin created the Bitcoin Stock2Fomo Hyperbolic Model[4] to amusement a imaginable exemplary of bitcoin’s terms during a fiat hyperinflation scenario.

We physique further upon this exemplary beneath to amusement bitcoin’s integer scarcity arsenic the HODL terms model. But alternatively of utilizing a symmetric s-curve, we utilize the HODL exemplary to make an asymmetric s-curve pursuing the projections of illiquid supply.

The Price Model Does Not Account For Future Demand

Fiat ostentation and an expanding illiquid proviso stock of circulating proviso assumptions are the driving forces that make an inverse s-curve pattern. However, 1 of the HODL terms model’s shortcomings is that it assumes a changeless travel of request for bitcoin’s disposable liquid and highly liquid supply.

New request volition not beryllium a creaseless changeless resulting successful the aboriginal bitcoin terms to oscillate supra and beneath the model’s predicted value. The exemplary aims to instrumentality a much blimpish stance connected bitcoin’s terms history.

Lengthening Cycle

The HODL terms exemplary leverages the HODL exemplary inflection constituent astatine its center. The inflection point, occurring astatine the 3rd halving successful 2020, supports a important alteration successful marketplace operation which whitethorn lend to the thought of lengthening cycles.

The abundance of liquid and highly-liquid proviso adjacent the inflection constituent (the flattest portion of the s-curve) whitethorn beryllium a origin for the current, comparative sideways and ranging terms enactment compared to erstwhile cycles.

Although liquid and highly-liquid proviso tightening cycles could again shorten, it is possibly much apt that the diminishing effect of the halvings cycles volition beryllium little impacted. This whitethorn effect successful much earthy boom/bust cycles varying successful magnitude based connected different catalysts and marketplace conditions.

The exemplary results and illustration beneath amusement the inverse s-curve signifier pursuing the HODL model’s proposal and illiquid proviso projections. Unlike a log-curve with a continuous decreasing slope, the HODL terms exemplary has an expanding slope from the inflection constituent onwards. The HODL terms exemplary projects bitcoin terms to scope $1,000,000 adjacent the 5th halving astir 2028.

References

1. https://insights.glassnode.com/bitcoin-liquid-supply/
2. https://insights.glassnode.com/quantifying-bitcoin-hodler-supply/
3. https://en.wikipedia.org/wiki/Inverse_hyperbolic_functions
4. https://twitter.com/w_s_bitcoin/status/1492511360193900547

This is simply a impermanent station by Rational Root. Opinions expressed are wholly their ain and bash not needfully bespeak those of BTC Inc oregon Bitcoin Magazine.