To better understand what happened at the 3rd Halving, let's first take a moment to review the various on-chain methods utilized to measure HODL behavior. Once we have a clear understanding of these methods, we can then delve deeper into what happened at the 3rd Halving. Already know what illiquid supply is? Feel free to skip to what happened at the 3rd Halving.
The first method to measure HODL behavior is by looking at the age of coins. The longer a coin has been held, the less likely it will be spent. Looking at Bitcoin’s history shows that after a period of 5 months, coins are extremely less likely to be spent unless we see a parabolic price rise.
Using this 5-month cutoff, we can classify Bitcoin’s supply into Short & Long-Term Holders. Doing so helps us better understand the direction of price. Short-Term Holders (STH) are more affected by day-to-day price action, and Long-Term Holders (LTH) give insight into HODL behavior and set more of a long-term price floor.
A second powerful approach to classify Bitcoin’s supply is by looking at spending behavior rather than time. Just like using a 5-month period for determining LTH’s, we can say that entities that hold over 75% of the Bitcoin they take in are considered illiquid. Consequently, entities that spent more than 25% of their holdings are considered liquid, independant of time.
Both LTH supply and illiquid supply measure HODL behavior. None of the techniques used are a perfect representation, yet both are powerful proxies and provide a similar signal as shown in the chart below. 👇
While they generally provide a similar signal, notice how LTH supply is more affected by price behavior. During a parabolic price rise, LTH’s take profit and sell part of their stack. These drawdowns don’t show up in illiquid supply because new holders that come in during such a parabolic rise make up for the loss of previously considered illiquid supply. Illiquid supply, therefore, provides a more steady signal.
What happened at the 3rd Halving?
With illiquid supply growing at an increasing pace, and circulating supply flattening out ever more with each halving, a logical conclusion is that at some point illiquid supply growth starts to outpace new supply issuance.
The “HODL model hypothesis” is that bitcoin crossed a historic inflection point at the third halving, where the asset’s illiquid supply is outpacing the rate of new supply issuance, and future halvings with lower supply issuance will exacerbate this divergence.
👆 View live chart at the Bitcoin Strategy Platform.
Note how the gap is the widest at the 3rd Halving and narrowing down towards the 4th and 5th Halving.
Why is this important you say? Because up until the third halving Bitcoin was becoming more abundant. Remember that 19 million of the total 21 million coins have entered circulation in the first 14 years of Bitcoin’s existence and the remaining 2 million will be entering circulation over the next 100 years. Since the third halving, Bitcoin is becoming more scarce!
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Diminishing returns
Bitcoin becoming more scarce could demolish the diminishing returns theory, causing higher returns in the future. Are we finally going to find out what Bitcoin’s invention of digital scarcity means?
To dampen the excitement, we’ll consider the forces at play. On the one hand, we have a growing market cap which puts downward pressure on price and increases the chances of diminishing returns. On the other we have scarcity putting upward pressure on price.
The question remains which of these two is the dominant force.
Could scarcity be the dominant force? Next, we’ll look at the HODL Model-S, a more optimistic variant of the HODL Model by using an S-curve showing perhaps it can be.