Posted 9 months ago | by Ben Armstrong
Over half of all the bitcoin in existence is being held, unused, and untraded by investors. This is why they do it.
If you’re new to the bitcoin world and crypto trading scene in general, you’ve probably stumbled across the term “HODL”. Pronounced like “coddle”. While the term comes from a misspelling for “hold”, it’s become a popular acronym for the term “Hold On for Dear Life” within the cryptocurrency sphere. Popularized in 2013, the term became a mantra for seasoned bitcoin investors, as holding onto coins long-term showed a far superior return on investment.
While newer investors may turn to exchange platforms like Bitvavo for advice on how best to use their investments, it’s generally suggested that at least a fractional amount of those holding be stowed away for another day.
A Digital Gold
Bitcoin is often referred to as “digital gold”, which if you’re not familiar with traditional stock markets refers to the fact that bitcoin behaves as a type of stored value asset- just like gold. Just having gold in your account is a store of wealth. You may not walk into your local Walmart and brandish gold bars for groceries any time soon, but the metal is still highly sought after, limited in supply, and incredibly useful.
All things that could easily identify bitcoins (minus the metal part). Bitcoin is becoming more and more highly sought after, as adoption continues, bitcoin ATMs pop-up, more of the general public invests, and even retailers are becoming quicker to embrace bitcoin as an accepted form of payment.
Bitcoin is also finite in its supply. There are only 21 million bitcoins in existence, and there will only ever be 21 million bitcoins in existence. No more will ever be created. This is one of the main ways in which bitcoin becomes a store of value, based on the economic principle of “artificial scarcity”. Artificial scarcity means there is a limited supply of something in existence, alongside limited market liquidity. Because of this, something becomes more difficult to buy as stores of it are snatched up. Which then flows into a supply and demand paradigm, which we’re all probably familiar with.
Bitcoin is also incredibly useful in a number of different ways. Not just as a currency, but as a token representative of incredible technology, and a system of hallmark principles that are important to many. Perhaps most importantly- bitcoin is incredibly useful as a store of value. So, seasoned investors tend to hold on to the coins they have, making fewer available, increasing prices. Just like gold.
How Holding Affects the Market
Even the savviest and well-to-do bitcoin hoarders use a portion of their assets for day trading. This is because interaction and a bit of liquidity are good for market prices. As it keeps prices in a good area so new investors still have room to buy in and retailers still have the ability to really offer it as a payment option that won’t see users paying $10,000 for a $10 item should the market swing.
In fact, most of the traders that make up daily transactions are considered retail traders. They are the ones that deposit less than $10k worth of bitcoin on exchanges at a time. These account for nearly 96% of all weekly transactions.
Where’s the Rest?
Over 60% of all of the bitcoins in existence are held as long term investment, which means a solid 40% (roughly 7.4 million) are being traded around the markets, right?
Unfortunately, no. That’s not the case. Of the 18.5 million (ish) bitcoins that have been mined to date, only about 3.5 million of those are circulating. Which leaves a hearty chunk unaccounted for. So where have they all gone? Well, in the early days of crypto, many coins were lost, forgotten, or accidentally destroyed. Not to mention a large amount of them were stolen- which leaves about 3.7 million of the coins being gone for good.
There are still 2.4 million coins to be mined, but those won’t be fully released until around 2140. This was all a part of Satoshi’s original design. Because bitcoin gains it’s value from artificial scarcity (see above), they knew that should all the coins be released immediately, the price would plummet as the market was saturated. So through “mining”, the process by which bitcoin transactions are verified, these coins could be released on a schedule that correlates with market interaction. Fewer transactions mean fewer coins mined.
As miners validate transactions they are paid what’s called a “block reward”. The amount of block reward that gets paid out halves every time 210,000 blocks have been added to the blockchain. So as bitcoin travels on through time, and adoption continues to rise, miners will be paid less for their endeavors. With the idea being that once all the coins are mined, miners will then rely on transaction fees for compensation for their efforts. But that’s a long way away yet.