Bitcoin in 2019 wasn’t hodled or spent; it was ‘traded’
When Bitcoin was created in 2009, it aimed at becoming the universal currency of the world, one that could be both a Store-of-value [SoV], as well as a Medium-of-exchange [MoV]. The problem was, to many, that these two objectives would curate the cryptocurrency very differently.
The consequence of this debate led to faultlines being made within the cryptocurrency space, with some siding with Bitcoin’s ambition as a cash-like asset, while others presented a more long-term investment ambition, one which would be accompanied by [ambitious] valuations based on [absurd] timelines.
Bitcoin
was placed - currency
against or
two paradigms investment.
On one hand, like the US dollar, Bitcoin would be a method of payment that resulted from acceptance and stability, allowing it to be a ‘spending’ rather than a ‘spent’ asset. On the other, Bitcoin would be digital gold, its value rising with time, a ‘treasure-chest’ approach, allowing more value the longer you hold.
Currency and investment were parlayed as spending and hodling. While the former was underscored with the adoption and use of the cryptocurrency, the latter was developed out of the need to hold on the coins while the dollar and gold collapsed.
Two years ago when Bitcoin soared, 2017 saw a linear price-movement upwards, one which was sharply reversed in 2018. In 2019, the price didn’t move in one constant direction owing to waves of macro and institutional price movements, causing the spending and holding pattern of the year to be thrown out of whack.
Coming off a bearish 2018 which scalped 72 percent off the price, Bitcoin began the year at $3,800. While the first three months showed stagnant movement, the second quarter saw Bitcoin boom. From April to June, Bitcoin was up by over 250 percent, reaching its 2019 peak at $13,800 owing to several tech and financial giants adopting digital currencies and creating their own.
In H2, Bitcoin, trading in a descending triangle, declined quite sharply and fell out of the five-figure mark, dropping to as low as $6,800 in late November owing to Chinese FUD. As things stand, the king coin is trading at just above $7,300, 92 percent over its price at the beginning of the year, but 47 percent below its 2019 peak.
Given this high-and-low, retail investors, the ones to whom the question of - spend or hold is actually posed, were left scratching their heads.
To add to this confusion, owing to the introduction of several exchange features and derivatives trading, the ‘spending versus holding’ mindset devolved into storing coins on an exchange, rather than in one’s own wallet, with their own private key and trading coins-on-paper in contracts.
Hence, 2019 saw a “less liquid” Bitcoin, according to Chainalysis’ Chief Economist Philip Gradwell. He told AMBCrypto,
“The bitcoin that is liquid seems to be in high circulation, with the dollar value moved on-chain more than doubling since the depths of the bear market in February 2019, to levels not seen since the tail of the bear market in May 2018.”
Centralization of finance was the main entity that Bitcoin aimed to replace. Created in the aftermath of an economic collapse, Bitcoin aimed to operate without a centralised figurehead. However, as the industry developed, many central figures emerged.
For spending and holding, the need to go through an intermediary diluted the true nature of Bitcoin, either as a transaction portal or to store one’s coins.
Capriole’s Charles Edwards told AMBCrypto that the main change of Bitcoin as an investment is because of the “centralization of Bitcoin,” attributing it to “institutions” and its use in “derivatives trading.” This caused a decrease in on-chain Bitcoin transactions.
Noting this as the”institutionalization of Bitcoin,” Edwards stated that Bitcoin’s daily average spot market has grown to four times the size of the on-chain volume and the daily average on-chain transaction value is merely 10 percent smaller than daily spot transactions.
With Bitcoin being seen as ‘tradeable,’ its use has moved from principled alternatives to a “high-frequency asset.” He added,
“A higher relative portion of exchange-based transactions suggests Bitcoin is entering the era of high frequency trading. With traders moving in- and out- of Bitcoin positions many times per day...Off-chain trading volume today is magnitudes greater than on-chain volume.”
Another source of ‘centralization’ is the plethora of exchanges that now dominate the market. Edwards posited that exchange hodling is contrary to the “Maximalist matra” of - not your keys not your coin.
According to Token Analyst, ‘Exchanges are the biggest holders.’ Their October 2019 study concluded that just under $10 billion or 6.7 percent of all BTC in circulation is held in exchange wallets.
The hoarding swells when the term “exchange wallets” is expanded to “intermediaries.” Ryan Radloff, CEO of CoinShares, elaborated on this in a blogpost, comparing the “dependence” of financial assets to their ‘third-party intermediaries.’ Bitcoin, based on the “evolution of a trend,” has removed the need for intermediaries and has given users a choice to “hold a completely digital bearer asset.”
Radloff laid out the BTCs being held by third-party intermediaries in the attached table,
Based on his findings, Radloff estimated that 17 percent of the circulating BTC supply [March 2019] was “likely custodied by a third party,” which he classifies as “an entity that is not the ultimate beneficial owner.”
To provide a more time-bound perspective, Edwards stated,
“In less than 3 years, Bitcoin stored on exchanges has grown over 700%. Through bull and bear markets, more and more Bitcoin is being concentrated on centralized platforms.”
Hodling, to many, refers to personally holding the Bitcoins in one’s wallets. While exchanges have seen rapid growth in use and volume, so have holdings in BTC wallets, for the most part. Edwards contends this metric as a good measure of “smart money.”
If we look at the Bitcoin addresses with balances less than $1,000, the trend has been increasing since January 2018. In fact, it reached its highest mark of just short
of 2,200 wallets in September 2019, currently at 2,128 wallets. Since the amount is too meager to be held by hedge funds and professional traders, Edwards attributed this to a few “early investors, miners, exchanges,” but cannot paint a bigger picture of hodling.
The measure that would be most appropriate for “smart money Hodling” would be the addresses with less than $100 in BTC. Edwards cited the old adage of traditional finance in which a diversified portfolio ought to have 1-2 percent in BTC to “benefit from its uncorrelated returns.” In his opinion, institutions, particularly the older generation, would “take a conservative approach like this to Bitcoin.”