Parabolic Bitcoin Bull Run Likely After Dormant Coin Supply Peaks, Past Data Suggests
The view that bitcoin's (BTC) fate is closely tied to what the Federal Reserve (Fed) does has been widely discussed. As a result, most traders looking to time the next parabolic bull run are waiting for the world's most powerful central bank to declare victory over inflation and abandon liquidity tightening.
While the Fed decisions are undoubtedly important, indicators unrelated to macroeconomic factors and unique to the crypto market, like coin dormancy metrics, could be equally valuable in timing the next bull run.
"Dormant supply peaks are springboards for upwards price action," Nike Bhatia, author of the best-selling book Layered Money, and market analyst Joe Consorti wrote in the latest edition of The Bitcoin Layer newsletter.
Bhatia concluded that after noting bitcoin's tendency to chalk out sharp multi-month rallies after the percent of circulating supply inactive for at least a year has peaked.
As seen in the featured image, the percent of supply that was inactive for at least a year topped in January 2016 and the peak preceded a major 21-month bull run that saw prices rise from $450 to $20,000 – a staggering 4,340% rally.
Similarly, bitcoin went berserk after the metric peaked in the third quarter of 2020, rallying from $10,000 to over $60,000 in six months to April 2021.
At press time, the percent of bitcoin dormant for at least a year stood at a record 65.76%, according to data sourced from blockchain analytics firm Glassnode.
If history is a guide, bitcoin may see another meteoric rally once the metric has peaked.
"If two-thirds of bitcoin is off the market (not for sale) for an extremely long period of time, the price is driven up when more buyers enter the market bidding for a finite supply—a scenario that has played out in bitcoin twice before," Bhatia noted, adding that there are more unspent one-year plus old coins than ever before.
On-chain data has its own set of limitations and the metric in consideration doesn't take into account fast-growing bitcoin-linked trading vehicles like derivatives, tokenized bitcoin, exchange-traded funds, exchange-traded products and trusts. Coins locked in these alternative vehicles are still liquid or active, even if they don't appear to be in on-chain metrics.
Nevertheless, the relationship between inactive supply and price trends is noteworthy.
"Is this causal or circumstantial? We don’t know. But when data moves in inverse-tandem in previous cycles, it catches our eye and demands attention," Bhatia said.
Bitcoin changed hands at $19,750 at press time, down 0.5% on a 24-hour basis, according to CoinDesk data.