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The Hodl Wave describes a specific behavior of Bitcoin transactions that we can see on the blockchain.

The term was coined by unchained capital who rendered a graph and an analysis about the transaction behavior.

Hodl, is refers to “hold” and the idea of keeping bitcoin for the long-term. The misspelled variation came up in a bitcoin forum when a post was titled “I AM HODLING”. It’s also translated to ‘Hold on for dear life’ meaning to never sell bitcoin until Bitcoin is a medium of exchange. Bitcoiners who “hodl” are holders of last resort and will simply not sell at any price. Therefore, when bitcoin crashes, the holders of last resort determine the all time low of the bitcoin price. The bitcoin price might crash at any point in time but never below the floor kept by the holders of last resort.

The interesting part is that, analysis of the Bitcoin network have shown that there are waves of new investors who keep their stash in one wallet and never move it.

Bitcoin is not simple to understand and it takes some serious effort to grow solid knowledge, hence we want to dig a little bit deeper into the logic behind the HODL wave. 

In order to explain it we first need to understand what we can actually use as a source of data, since there are no official statistics about Bitcoin users. Bitcoin uses an accounting structure called Unspent Transaction Output (UTXO). All UTXOs are timestamped by the transaction/block in which they were created. Since all bitcoin in existence is contained in some UTXO, this means that all bitcoins have an age: not the age/time when that bitcoin was first mined, but when it was last used in a transaction.

The article written by Dhruv Bansal explains in details the variables of the Bitcoin UTXO Age Distribution.

 Bansal states in his article: “This chart is fascinating because it displays the macroscopic shifts that have occurred in Bitcoin’s ownership through history. Spikes in the bottom, warmer-colored age bands (<1 day, 1 day — 1 week, 1 week — 1 month) indicate large amounts of bitcoin suddenly transacting. The steady growth of the top, color-colored age bands (2–3 years, 3–5 years, >5 years) shows bitcoin that’s not being transacted with, idling between rallies. The interaction between these two patterns illustrates the behavior of Bitcoin’s investors during market cycles.”

There is a common behavior that Bitcoin holders are showing when large amount of Bitcoin transaction are executed on the way up to and through a local price high.
For example in December 2013 the value of Bitcoin leaped from $33 to $1,000 in a few days. This not only resulted in a massive sell-off, as many early investors were able to cash out, but also a new wave of people owning and holding Bitcoin for the first time. In Fact, these waves are driven by a desire to have more of a type of cryptocurrency and the assumption that they will be worth more over time.

Finally, profit and return of investment is tied to your decision making. Decision making is based on the assessment of the markets and what drives its current valuation. Buying during a bull run or at the peak can result in a loss when a price correction appears and novices tend to panic sell. On the other side the “HODLERS” are those type of investors who have showed major interest in holding Bitcoin as a store of value for the long-term. They only invest what they can surely left aside for a couple of years or even longer. They understand the risk that if they need to liquidate their Bitcoin assets into fiat on the short-term they might have to do that on a heavy discount and loss. But the HODLERS believe that Bitcoin is superior money (money in the original sense as a store of value) and don’t necessarily want to use it as a means of exchange immediately.

Given that Bitcoin is limited to 21 million (but infinitely divisible) a higher demand will result in and increase of the scarcity of the asset and thus and increase in price and value. The earlier the investor got on board the cheaper his price to invest and the higher his net return.

Looking into the history of money and reading into the austrian school of economics and it’s theories on value and money cycles it can be assumed that Investors with a long-term view and understanding of the nature of money will be able to capitalize this effect much more than a short-term view on financial markets. The HODL WAVE is a beautiful reflection of this phenomenon.