Crypto Mid-Week Review 6/26

Published in

Circle Research

5 min readJun 27, 2019

Curated reads, listens, views by Wilson Withiam and Ria Bhutoria.

Quick note: We apologize for the delay in publishing our usual Crypto Weekend Review, but we have hard at work on some new research material that should be hitting your inboxes soon! This segment will be back to its regularly scheduled release next week.

Weekly Spotlight 🔦

Bitcoin Average Dormancy by Reginald Smith and David Puell

Crypto asset valuation is considered a deeply important field as related research is helping investors separate useful market signals from the cluttered mass of on-chain data and Twitter opinions. Reginald Smith and David Puell’s latest work exploring Bitcoin dormancy provides yet another actionable valuation method that can shed some light on the state of Bitcoin market cycles and its long-term economic health.

Bitcoin dormancy — which was first proposed by Smith in 2018 — is a ratio of coindays destroyed* to on-chain transaction volume. Both metrics help describe Bitcoin’s economic state independently, but Smith says dormancy integrates these “narratives into a single metric” and simplifies the process of distinguishing bullish from bearish market activity. High dormancy means more long-term holders are selling their coins (likely to take some profits), a bearish indicator. In comparison, low dormancy is bullish as more coins are being held for a longer period of time.

Smith and Puell then built off of Smith’s original idea and introduced two new attempts at capturing phases in Bitcoin’s market cycles: (1) the ratio of dormancy to UTXO age (DUA ratio) and (2) dormancy flow. DUA ratio helps measure whether the Bitcoin market is in a stage of accumulation or distribution, while Puell says dormancy flow is ideal for marking Bitcoin price bottoms and assessing bull market “health.” The authors do caution dormancy is prone to false signals (like when Coinbase transferred a large percentage of funds between cold storage wallets last December) and may become less reliable long-term if any major network fundamentals start to shift.

For more on Bitcoin and crypto valuation methods from some of the top minds in the space (like Smith and Puell), check out the Valuation Depot on Kana & Katana (courtesy of Ikigai Asset Management).

*Coindays destroyed or bitcoin days destroyed was first introduced in 2011 as alternative to total transaction volume, which can be easily manipulated by a single actor. Coindays destroyed is calculated by multiplying a Bitcoin UTXO amount by the number of days since it last moved, attributing more weight to dormant coins, or coins that have not been spent in a while. For an example, 1 BTC that hasn’t moved in 100 days is equal to 100 BTC that were spent a day ago. Since the weighted approach accounts for transaction volume manipulation, coindays destroyed is considered a better measurement of real on-chain economic activity.

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