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Supply Held by Long and Short-Term Holders
The total coin supply held by on-chain entities classified as Long-Term, or Short-Term holders.
At Glassnode, one approach we take towards classifying on-chain user cohorts is based on a concept of Long-Term Holders (LTH) and Short-Term Holders (STH). These classifications are based on observed spending behaviours and statistical patterns of coin movements that embody the polarities of low, and high time preference investors. For full details on the analysis and statistical reasoning behind LTH-STH classification, please refer to articles here and here.
A general framework for considering LTH and STH supply is as follows:
- Long-Term Holders keep possession of their coins for periods of time spanning several months to years. We consider an approximate threshold of a 155-day holding period, after which dormant coins becoming increasingly unlikely to be spent.
- Short-Term Holders are newer market entrants, active traders, and "weak hands" that a more likely to exit positions in response to market volatility. Coins younger than 155-days are statistically more likely to be re-spent, and thus are considered a more liquid and active portion of the supply.
The chart below shows the cyclical transition of supply held by LTH (blue) and STH (orange) that tends to correlate with bull and bear cycles.
Based on previous historical spend analysis, a coin becomes statistically unlikely to be moved after 155 days of dormancy. This data point is used as a threshold to delineate between Long-Term and Short-Term Holders.
To improve visualization, a smoothing curve is used to model the weighting of the LTH-STH buckets. This smoothing ensures that resulting metrics do not suffer from artefacts related to a few hodlers suddenly crossing the sharp threshold. The midpoint is at 155 days and with a transition width of 10 days (details here).
The current suite of Long-Term Holder and Short-Term Holder metrics are entity-adjusted, meaning they identify holders as individual market participants that own one or more addresses. On-chain entities are identified using heuristics and clustering algorithms outlined in a previous analysis.
The entity's average purchase date is used as the threshold for defining whether they're a Long-Term Holder or not. This means that when a new coin purchase is added to an entities balance, it is volume weighted against the existing balance to assess whether it is immediately classified as a LTH or STH supply. If for example 10% of a LTH entities balance was recently accumulated, those new coins would be considered LTH supply due to the heavier 90% balance having already been classified as such. If on the other hand 90% of the balance was recently accumulated, it would be classified as STH supply until the volume weighted age of the full balance reached the 155-day threshold.
To better reflect HODLer behaviour, supply held on exchanges is excluded from Long-Term/Short-Term Holder Supply. As a result, the sum of Long-term supply, Short-Term supply and exchange balances equals circulating supply.
LTH and STH Supply data illustrates the behaviour and preferences of market participants with a level of precision previously unavailable in any other asset class. This new, magnified look at the market-wide psychology enables users to not only understand where things stand today, but how they could also change in the future. At the core, an understanding of Long- and Short-Term supply dynamics can help position analysis into bull or bear market context, and understand the balance between illiquid and liquid supply.
The distribution and shifts in supply held by LTHs and STHs are incredibly useful in understanding where Bitcoin is within a bullish or bearish cycle. These signals are as follows:
LTHs are often considered under the lens of being patient, and more experienced investors (smart money). This cohort tend to accumulate cheap coins during bearish trends, and distribute into bull market strength.
Periods of time where LTH supply increases generally indicate:
- A larger proportion of the coin supply is becoming dormant, illiquid, and likely held by market participants who are less sensitive to shorter term price action.
- A bearish trend is in play where gradual accumulation is taking place place. This often precedes a bullish impulse in price action as the coin supply is eventually constrained.
- LTHs generally recommence coin spending (assumed distribution) as the market price approaches previous all-time-highs.
When LTHs spend their coins and they change hands (on an entity-adjusted basis), the accumulated lifespan is destroyed, and the coin classification is reset to STH held supply. As such, STH supply tends to swell during bullish markets, in response to LTHs distributing into strength, and shrink during bear markets as accumulation takes place.
Periods of time where STH supply increases generally indicate:
- Indicates a large amount of coins are being actively spent, particularly by LTHs who often have more experience and timing of market cycles. This has a corresponding impact on circulating liquid supply and thus sell-side pressure.
- Increases the coin volume held by newer and less experienced market participants. STH supply has a greater probability of being spent in response to market volatility.