Exploring Bitcoin Market Cycles Through HODL Waves—Are Long-Term BTC Holders Cashing Out?
Analyzing HODL Waves and the Bitcoin Market Cycle | Credit: Hameem Sarwar
Key Takeaways
- The HODL Wave visualizes the age distribution of Bitcoin moving on-chain.
- Swelling of the short-term bands up to three months has historically indicated a market top.
- What does the indicator say about the health of the current Bitcoin market cycle?
Previous Bitcoin market cycles have shared similar characteristics. One notable one is that long-term holders offload their holding to short-term participants near market cycle tops. This was evident in both 2017 and 2021 and visualized by the HODL wave indicator.
With that in mind, what of these characteristics are present in the current bull run, and how can we use the HODL wave indicator to predict when the Bitcoin market cycle will end?
What Is the HODL Waves Indicator
Bitcoin uses the Unspent Transaction Output (UTXO) accounting method. This means that each Bitcoin’s age is the time it last moved in a transaction, rather than the time it was first mined.
HODL Waves is an indicator that visualizes the age distribution of Bitcoin’s UTXO. It uses different colored bands to represent the fraction of BTC transacted in specific time windows. The indicator helps analyze spending activity by focusing on long- and short-term holders. The Realized Cap HODL wave indicator divides these bands by the realized price.
In its default setting, the HODL Wave indicator uses warm colors (Red, Orange) to represent Bitcoin that transacted recently. It uses cooler colors (Light yellow, Green, Blue) to represent BTC that has not transacted in a while.
The swelling of long-term bands signifies that new market participants are not letting go of their Bitcoin, graduating into long-term holders. Conversely, their shrinking shows that long-term holders are taking profits.
Historically, market conditions when nearly half of the total Bitcoin was transacted in the past three months have signaled market tops. This is because short-term speculators have less conviction and are more likely to sell, exacerbating market downturns.
HODL Wave Readings in the Previous Cycle
A distinct characteristic in the 2017 and 2021 Bitcoin market cycle tops was that short-term trades dominated the activity. Both times, more than 70% of the total Bitcoin in existence had transacted in the past three months. This ratio was higher in 2017 compared to 2021.
Then, these bands declined as top buyers held at a loss until the bear market bottom. In the current market cycle, short-term bands only briefly moved above 40% before declining.
This shift becomes clearer when incorporating the one to two and two to three year bands into the equation since this is usually the time it takes for an entire market cycle.
Near bear market bottoms, these bands are usually the largest. They contain all of the sellers from the previous market cycle highs. This was especially clear in January 2019.
At the time, nearly 50% of the total Bitcoin in existence was transacted in this period (black arrow). This represents market buyers from January 2016 to January 2018, encompassing the entirety of the bull run.
In January 2020, it is evident that the one to two year buyers moved into the two to three year band, as shown by the decrease in the former and the increase in the latter (blue arrow). So, buyers from the previous bull run did not take profits during the bear market.
This was also evident by the swelling of the three to five-year band, which now incorporates buyers from January 2016.
However, buyers took profit near the January 2021 highs, coinciding with the swelling of short-term bands. At the market top, the one to five year bands amounted to only 8% of the total Bitcoin transacted, since these long-term holders had already offloaded their holdings. (red arrow)
Predicting the Current Bitcoin Cycle
Moving on to the current market cycle, the one and five-year bands were at their highest in January 2023, near the bear market bottom. This is in line with the two previous market cycles.
As the BTC price began to rise, the one and two years band (light green) fell from 32% to 10% where it currently is. However, not all of this was from holders who decided to sell. Rather, a portion of it was one to two year holders becoming three to five year holders, since the latter band grew from 5% to 15% during this time.
This band now incorporates buyers from July 2019 to 2021 (black). It indicates that buyers from the entire bull market last year, especially those during the top have not sold yet. After going through the bear market, they have decided to hold for higher prices before possibly selling.
Going back to the previous market cycle, the sum of the one to five-year bands is 35%. This is considerably larger than the 8% in the previous market cycle tops.
As a result, the Realized Cap HODL wave indicator suggests the Bitcoin price is not close to its market cycle top yet. A distinctive sign of the market top would be the one to three month bands moving above 70% or for the 1-5 years bands to decline below 10%.
Long-Term Holders Are Not Selling Yet
The Realized Cap HODL Wave indicator can be used to determine the market cycle tops. More specifically, swelling of the one to three month bands above 70% and the decline of the one to five year bands below 10% have historically been regarded as signs of market cycle tops. Currently, the former is at 36% while the latter is at 35%. Neither are close to their thresholds of market cycle tops.
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