On-chain metrics are data created to analyze all the information provided by the blockchain network where a certain asset is issued, and the thorough reading of the record of all transactions of that asset is known as on-chain analysis, and this type of analysis can provide valuable signals to interpret market sentiment and make the analysis of a cryptocurrency more complete. And one metric used to measure the conviction of investors in a currency such as Bitcoin in their long-term positions is known as Hodl waves.
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A HODL wave is a graphical representation that, through a color scheme, shows us patterns of accumulation and spending of investors in a network such as Bitcoin, providing a perspective of the coins accumulated in the respective portfolios through the UTXO accounting model, i.e., we can study the age of the coins that are mobilizing, creating a distinctive pattern in the graph.
For example, if for two years a 2 BTC UTXO has not been spent, it is grouped with the rest of the UTXOs with two years without moving, i.e. without being transferred.
Making use of bands of different colors we are shown the fraction of a given cryptoasset that has been moved for the last time for a selected period of time. Basically we are shown two color settings:
Source: image taken from Glassnode.com.
The relationship between these two groups of colors can be used to analyze investor behavior over a market cycle. And as time goes by, the bands become larger and larger, which generates in the graph the scheme known as HODL wave.
To determine the age of a coin we are going to make use of the color scheme of the bands on the chart, the color bands work as age bands, and according to the color settings they range from 24 hours (red), between 1 day and 1 week (dark orange), from 1 to 3 months (light orange), between 6 and 12 months (yellow) and between 1 or more years (colors from light yellow to blue, or 10 years in the case of Bitcoin. In the following image we can summarize all the age bands.
Color scheme according to the age of the coins. Source: image created in PowerPoint.
For example, in the following HODL wave chart for Bitcoin we can see that by the beginning of 2010, when only BTC was a year old since its appearance, almost 55% of the existing BTC was contained in the 6-12 months age band, and from this point on we see that a large light yellow band starts to appear, which means that there is a large percentage of holders who have not moved their BTC in more than a year, then we see that the light green band appears, due to the fact that holders with more than one year now become holders with more than two years without moving their coins.
And in the same way it applies for the following age bands, showing us that by April 2021 (the last recorded period) just over 10% of the existing BTC has not moved for 10 years, with the largest percentage being concentrated in the 3-6 months and 3-5 years age bands.
Source: image taken from Glassnode.com.
In the HODL wave chart we can see that when a new band is formed the previous band is reduced, indicating the passing of holders from one period to the next, but when there is a peak in the movement of the coin this also occurs, so we can see what type of holders are responsible for the selling.
Thus, the HODL wave links spent coins to unspent coins in a market cycle from UTXO transactions. Thus, if a band instead of shrinking expands, it refers to an increase in the percentage of holders who do not move their coins, keeping their funds intact for longer. Then, the little change in the UTXO means a lower availability of the currency in the market, which influences the increase of the price giving rise to a bullish cycle.
For example, if we look at the following chart for BTC, we notice that before the July 2017 high, the 3-5 year band was the widest, meaning that BTC owners between 2 and 3 years held their positions quite a bit and moved to the older band. Then we see that between the July 2017 and January 2018 highs these 2-3 year and 3-5 year bands narrowed quite a bit, meaning that a large percentage of BTC holders between 2-5 years took their profits at the end of 2017.
Source: image taken from Glassnode.com.
We can also observe that in the highs reached in January 2018, the orange bands are wider with respect to the high of July 2017, with which we can determine that during this period, there were fewer short-term transactions, so that the currencies without moving in the portfolios were able to mature to ages of 3-6 months, which favored the trend of the moment.
Well friends, as we can see, Hodl waves represent a metric that indicates the time commitment of investors with their assets, so Hodl waves serve us to estimate periods of accumulation and profit taking by the holders of currencies.
I hope you liked the information, see you next time!
