Analysts develop new framework to decipher Bitcoin economy in bear market

Analysts develop new framework to decipher Bitcoin economy in bear market

Understanding the Bitcoin Economy: A New Framework for Analysis

Investment firm Ark Invest and blockchain security firm Glassnode have recently released a whitepaper titled “Cointime Economics: A New Framework for Bitcoin On-chain Analysis”, presenting a conceptual framework to understand the Bitcoin economy in today’s bear market. This article will provide a comprehensive overview of this framework, exploring the key concepts and metrics introduced.

The Cointime Economics Approach

The whitepaper focuses on the differences between the current unspent transaction (UTXO) and a new model called “cointime” that assesses the “real economic weight of a Bitcoin.” The cointime economics approach considers the importance of a Bitcoin based on the last time it was moved. This approach introduces the concept of a “coinblock,” which demonstrates the influence of unmoved Bitcoin on the economy.

To illustrate this concept, let’s consider an example. Suppose 10 coins are held during the time it takes to produce 10 blocks. This scenario represents 100 coinblocks. Heavy coinblock destruction signifies that long-term holders are selling their Bitcoin. These “smart money” investors typically possess larger Bitcoin balances, trade from lower cost bases, and generate higher profits.

Metrics for Analyzing Bitcoin’s Economic State

The whitepaper introduces two new metrics for analyzing Bitcoin’s economic state: liveliness and vaultedness.

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Liveliness measures the activity level of the network, indicating how often coins are moved or destroyed. A high level of liveliness suggests active participation in the Bitcoin economy, while a low level implies a more passive approach.

Vaultedness refers to the number of coins that are stored and signifies how inactive the protocol is. A higher vaultedness indicates a greater number of inactive coins, potentially reflecting a lack of active engagement with the Bitcoin network.

Benefits of the Cointime Framework

The authors claim that the cointime framework offers a consistent and mathematical approach to measuring the economic importance of each Bitcoin over time. Unlike the UTXO framework, which deems a coin as “moved” as it leaves its coinbase address, the cointime framework weighs each coin based on the time it has remained static.

This approach recognizes that if older coins move, they will have a larger impact on Bitcoin’s economic activity. By considering the duration of a coin’s inactivity, the cointime framework provides a more nuanced understanding of Bitcoin’s economic dynamics.

Bitcoin’s Hurdles Before the Next Bull Run

While the cointime framework enhances our understanding of the Bitcoin economy, it is important to acknowledge the hurdles the cryptocurrency faces before the next bull run.

One of the immediate challenges Bitcoin encounters is its macroeconomic environment. In a rising interest rate climate, investors often seek risk-free assets that provide reliable yields. Comparatively, Bitcoin lacks intrinsic value and cash flow generation potential, making it less attractive compared to Treasury bills or cash.

Beyond macroeconomic headwinds, Bitcoin must prove its use case beyond being an investment vehicle. While considered a highly disruptive technology, the majority of people currently view Bitcoin as a store of value rather than actively utilizing it in daily transactions.

On a more positive note, some argue that Bitcoin’s upcoming halvening event in April 2024 could drive market rallies. The halvening event reduces the rewards earned by Bitcoin miners and has historically been followed by bullish market trends.

In conclusion, the cointime framework provides a new perspective on analyzing the Bitcoin economy. By considering the duration of a coin’s inactivity, this approach offers a more comprehensive understanding of Bitcoin’s economic dynamics. However, as Bitcoin faces macroeconomic challenges and the need to establish broader use cases, it must navigate these hurdles before the next potential bull run.

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