Analysis: Around 70% of Bitcoins Unspent for Six Months or More

UPDATE (16:30 BST 24th November): Updated with additional comment from Tim Swanson.

As many as 70% of all bitcoins in circulation have not moved in at least six months, according to data provided by Reddit user John Ratcliff.

Ratcliff, a principal engineer at NVIDIA who in his spare time uses 3D tools to visualize blockchain analytics, published the new charts to provide the community with a better idea of how and when bitcoins have moved in recent months.

Describing one of the charts, he said:

"This graph shows, I believe, a reasonable measure of 'liquidity', in other words a measure of all bitcoins in existence, how many move each day, week, month, etc."

An analysis of the charts by cryptocurrency author and enthusiast Tim Swanson indicates that many bitcoins were bought during the late-2013 bubble, which peaked roughly a year ago, and are still unspent – presumably while their owners await a hike in price.

Swanson also points out a "sobering" trend: although the number of merchants accepting bitcoin has increased fourfold this year, blockchain activity is not seeing a corresponding increase.

Bubble buyers holding on to their coins

Swanson explains that bitcoin movement correlates with a rapid increase in market prices, namely in April 2013 and November 2013. The substantial price drop following the 2013 bubble caused a reduction in blockchain movement and a majority of bitcoins are simply inactive.

Swanson finds the lack of movement in bitcoins bought at the top of the market particularly intriguing:

"What is especially interesting is to see the 'overhang' or rather the 'underwater' coins that are moving from the three months to the six- to 12-month band. What this effectively shows is that owners of those [bitcoins] purchased them during the bubble of November-December 2013 and are still willing to wait and hold onto these coins until the price rebounds."

Swanson predicts that lack of upward movement in prices will eventually force the owners of these coins to sell them sometime in the spring of 2015.

Monthly liquidity is still hovering around the 10% mark and Swanson argues that Blockchain's transaction volume chart is no longer valid due to increased advertisement spam, mixing, mining rewards and a range of other factors.

Pseudoanonymity makes analysis challenging

Swanson told CoinDesk that the pseudonymous nature of the blockchain prevents exact analysis.

"We cannot know for sure exactly when someone paid for a UTXO but if the self-reported numbers from exchanges during the November-January time frame are correct, based on the moving mass on John's chart there could be upwards of one million coins whose owners are effectively underwater and are waiting until a rebound," said Swanson.

Swanson said if the if the 2004-2007 mortgage overhang is used as a facsimile, some owners can and will hold onto an asset as long as they can before realizing market losses (eg, selling).

He explained what could cause this behaviour:

"Some can wait indefinitely because it represented a minority of their portfolio. From its December peak, market prices have declined globally around 65% as of today and thus these theoretical "underwater" speculators could exist at many points along this curve including as recently as four months ago, when market prices were 50% higher than they are today. Perhaps prices will eventually rebound and these UTXOs will move once again, this is an area for future traffic analysis."

The true cost of bitcoin security

The problem with such low volumes is that the sheer cost of maintaining the network amounts to 3,600 bitcoins every day, which effectively pays for security.

Swanson argues that the ratio of mined and processed coins, which is close to 1:2, means that a "massive security overkill" is still taking place – a situation that is analogous to "every other mall patron ... effectively being guarded by a mall cop".

Stressing that network transaction fees would have to increase by several orders of magnitude to replace the current mining incentive approach, Swanson concluded that holding or hoarding coins is understandable, but also problematic for a modern currency.

Miners currently have to spend the bulk of freshly mined coins within weeks in order to sustain their operations, hence they inject thousands of new coins on the market each day.

Merchants battling for limited coins

Another conclusion, Swanson says, is that the increase in the number of merchants willing to accept bitcoin has not translated to increased use of the digital currency on the part of consumers.

"Despite the near quadrupling of merchants that now accept bitcoin as payments (this past year increased from ~20k in January to ~76k through September), on-chain activity has not seen a corresponding increase by consumers," he said. "They are all effectively fighting for the same thin slice of liquid coins, a segment which empirically has not grown."

Swanson concludes that payment processors collectively process 5,000-6,000 BTC on any given day, with the caveat that some additional activity could be taking place off-blockchain in trusted third parties.

In May, Swanson penned a CoinDesk feature, analysing blockchain trends and elaborating on why such analyses can be daunting (and inaccurate due to external factors that must be compensated for).

In the feature, he also stated that very little on-chain growth can be witnessed, as most of the growth is coming from 'trust-me silos' and in many cases trades were the result of security measures rather than commercial activity.

Correction: A previous version of this article contained an error in the source of the data charts. This has now been corrected.

Charts via John Ratcliff