Coin Days Destroyed is a measure of economic activity which gives more weight to coins which haven't been spent for a long time.
It is considered an important alternative to looking at total transaction volumes, which may not accurately represent economic activity if value was not stored for a meaningful time. Conversely, coins held in cold storage as a long term store of value are considered economically important when they are spent as it signals a notable change in long-term holder behaviour.
Every day one coin unit remains unspent, it accumulates one "coin day". When that coin is eventually spent, the accumulated coin days are reset to zero, or "destroyed" and registered by the CDD metric. The aggregate number of coin days destroyed (CDD indicator value) in a given period of time is a function of the number of coins spent multiplied by the lifespan of those coins.
A UTXO for 2 BTC that is dormant for 100-days has accumulated 200 coin days.
A UTXO for 0.5 BTC that is dormant for 100-days has accumulated 50 coin days.
A UTXO for 10 BTC that is dormant for 6-hours (0.25-days) has accumulated 2.5 coin days.
Since the CDD metric captures both coin lifespan and coin volume, it is a valuable tool for observing the spending behaviour of entities classified as smart money, whales and long term investors.
CDD for a given UTXO is computed by multiplying its value and lifespan in days. The CDD metric constitutes the sum of these values for all spent outputs in the selected time range.
CDD is a valuable tool for observing the spending behaviour of long term holders and wealthy investors as it considers both lifespan and coin volume. It is particularly well suited for observing macro trends where entities who accumulated in previous cycles begin start spending their coins.
CDD is sensitive to the spending of:
Coins with long lifespans: where each old coin has accumulated large number of coin days.
Large coin volumes: where wealthy investors with large coin holdings are spent destroying a large number of coin days. Note that if the same set of coins are sent back and forth, at most, one coin day per unit coin transacted can be destroyed per day.
Large coin volumes which also have long lifespans: This combined effect will have an outsized impact on the CDD metric.
A common assumption is smart money entities and long term holders are likely to have a strong fundamental knowledge of the asset, tend to purchase coins at prices considered cheap, and spend coins considered expensive. As such, the CDD metric is often considered in line with the following framework:
High indicator values may indicate long term investors are spending coins to realise profits, taking advantage of market strength, or have reduced conviction to hold the asset. This may re-activate dormant supply into liquid circulating supply if the coins are sold.
Sustained high or trending higher indicator values add weight to conclusions around long term holder spending behaviour. CDD often trends higher in bullish markets as long term holders sell into market strength and often peak around local price tops.
Low indicator values occur when day-to-day network traffic dominates network traffic, older coins remain dormant, and conviction to hold the asset is high. Periods of reduced interest in the asset (such as bearish markets) tend to lead to less on-chain activity and thus lower indicator values.
Sustained low or trending lower indicator values may suggest confidence is returning for long term holders who are beginning to hold rather than spend their coins. These signals are common in bullish markets during price corrections and consolidations.
Absolute values of the CDD indicator must be interpreted within the context of the overall protocol age. It can be seen that the lower bound values of the CDD indicator increase gradually over time, a phenomena resulting from gradual accumulation of aggregate lifespan by the whole UTXO set. The Supply-Adjusted CDD metric accounts for this phenomena by adjusting the CDD indicator proportional to the increase in circulating supply over time.
With this in mind, some example observations with respect to the CDD indicator and horizontal levels are:
CDD values < 5 Million days have historically described day-to-day baseline traffic and in recent years has provided a lower-bound floor as the Bitcoin protocol accumulates coin days.
CDD values > than 10 million days are often correlated with bullish markets and local market tops or bottoms as a moderate increase in older coins moving due to spending by long term holders.
CDD values > than 20 million days are historically uncommon and tend to only occur during periods of high volatility as larger volumes of old coins are spent, potentially realising profits or losses.
Note that absolute values of CDD will vary over time and must be considered within this context and/or considered alongside the Supply-Adjusted CDD metric.
CDD often trends higher during bullish markets and returns to lower values during corrections and consolidations. Where CDD returns to lower levels after a period of being elevated, it may suggest improved confidence of long term holders who are opting to keep their coins dormant.
Bearish markets are also known for lower general interest in the asset, alongside greater dominance in off-chain exchange based volume, rather than demand for on-chain transactions. This tends to result in periods of lower CDD values.
Scale: linear or log.
Moving Averages: 7-day and/or 30-day.
Supply-Adjusted CDD accounts for the impact of time on the CDD metric. Since more coin days are accrued over time, the total potential CDD increases over time. As such, adjusting for supply (an increase in the number of coins in circulation over time) in the denominator provides a more proportional view of dormancy over the history of a market.
Binary CDD describes whether Supply-Adjusted CDD on any given day was above or below the historical average. In general, it shows whether longer-term market participants are entering or exiting the market. This metric was developed by Hans Hauge and Ikigai.
Bitcoin Forum user ByteCoin (April 2011)
BitcoinTalk - Re: Bitcoin Transaction Volume
Hans Hauge - Introducing Binary Adjusted BDD