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5 min read 

Despite being around since 2009, cryptocurrencies — and Bitcoin in particular — are still a risky investment to make. There are two major reasons for this: 1) cryptocurrencies are highly volatile, especially when compared to conventional assets and 2) there is still no universally accepted way of estimating their fundamental worth.

When you don’t know the true value of an asset, it becomes much harder to buy and sell it meaningfully. Luckily, a team of scientists led by Dhruv Bansal came up with a methodology to address the problem of fundamental cryptocurrency analysis. Using the UTXO functionality (Unspent Transaction Output), an essential part of the blockchain itself, the team is now able to analyze and predict major BTC price patterns.

What is it?

All Bitcoins have been created — mined — at a certain moment in time. Therefore, they all do have a particular age. UTXO, however, is not the age of the coin itself. Rather, it is the age of the last transaction which involved this particular coin. Using UTXO data from the blockchain, it is possible to create an age distribution diagram that will look like this:

HODL Waves — Identifying Long-term Bitcoin Patterns

Age distribution of Bitcoin (in percentage) is on the left Y-axis. USD/BTC (the black line) is on the right Y-axis. Warmer colors indicate coins that have relatively recently been used for transactions. Colder colors correspond to Bitcoins that have been kept intact by the owners. Well, that’s fascinating but how can it help you spot a major pattern? That’s where HODL waves comes into action.

How does it work?

It turns out that certain patterns can be observed when analyzing the UTXO age distribution chart. As a rule, after a major price rally (that last of them observed in March 2017 — January 2018) the trading activity falls off, and the average age of Bitcoins goes up. As of now, three major HODL waves can be observed throughout Bitcoin history. The Genesis HODL, unlike the two other waves, was not triggered by the price rally. Rather, it was a result of lackluster cryptocurrency infrastructure and inability to sell cryptocurrency via an exchange. During the HODL of 2011 and the Great HODL of 2014 the age structure of Bitcoin was influenced by the desire of crypto holders to capitalize on the growing BTC price.

After the most recent cryptocurrency plunge, observed in the beginning of 2018, the market is back to growth, which means a new HODL wave is unfolding as you read this article. Cryptocurrency traders are advised to closely follow the metric, as it has a lot of potential.

HODL Waves — Identifying Long-term Bitcoin Patterns

How to apply to trading?

It is quite obvious that when the BTC price goes up the majority of sound investors will stick to their assets and wait until the trend changes its direction. However, this chart can help you determine the right moment to enter/exit the market. Unlike traditional assets, Bitcoin gives you an opportunity to see how all market participants do behave. You can then decide whether to go with the tide or not. Waves take longer and longer to form as the time goes. It can be that the next HODL wave will take even longer to materialize.

Follow the age structure of Bitcoin, that is available as a direct link here, and use HODL waves to successfully trade Bitcoin. Of course, it is a long-term strategy, as HODL waves may take up to several years to unfold. But who said you can only trade Bitcoin in the short run?

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