Transfer of Wealth

You can be relieved that in this opportunity I am not going to talk about the conflict between Ukraine and Russia. Why? Because there are many people way more qualified than I to write about the topic and because the mainstream media is doing such a poor job at covering the events that even if I want to try to understand what’s going on, it would be simply an impossible task.

Neither I am going to talk about to what others refer as Bear Market. I would rather use a more useful and appropriate term which is period of “Transfer of Wealth”. Puzzled? Bear with me please (No pun intended).

In periods of growth or Bull Markets, we can see market participants willing to enter the space during rising prices because they have the expectation of be able to sell their recently acquired crypto assets at an even higher level. However, those who sell the cryptos to the new entrants during Bull runs are usually long-term holders that recognize that is time to take profits.

During periods of decreasing prices, what usually happens is that those who entered the market close to All Time High levels act under enormous pressure and are forced to liquidate their positions very quickly in order to cut losses. We call those investors “weak hands” or “paper hands” and those buying the crypto assets from them are either those who are holding old positions or those who have enough confident on the market to resist negative sentiment times and see profits in the medium to long runs. We call these investors “Diamond Hands”.

So, with that in the background I will say that every seasonal or professional investors in the crypto markets should pay close attention to the performance of any of the indicators that measure the average longevity of the bitcoins taking action in the trades.

This article is not intended to provide a comprehensive guide on how to analyze ratios and indicators that signal the beginning and end of periods of Transfer of Wealth or Market Bottoms.

But in this opportunity, I would like to share with you a ratio called CDD-90 or Coin Days Destroyed (90 days average) and is a measure of economic activity which gives more weight to coins which haven’t been spent for a long time in this case a period longer than 90 days.

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I like to use the average of 90 days because it corresponds with quarters which is how large institutional investors tend to behave due to their reporting obligations.

In the chart above we can see clearly how during the Bull run of 2017, the smart money or the diamond hands who have been holding for a long period of time put their bitcoins in circulation to take profits and after the collapse in price, those tokens with long holding duration decreased in activity. That means that the Diamond hand investors started again an accumulation phase until the next Bull run where they will be well prepared to take their future profits. That occurred briefly during 2019 and again during the Bull run of 2020 -21.

Meanwhile, what we see is a period where the Wealth is transferred from the weak and impatience paper hand investors to the experienced and willing to wait longer period Diamond Hand investors.

A Plateau in low activity of bitcoins with high CDD-90 could give us also, a strong indication that we might be at or close to a market bottom. Although this must be conformed with the help of other similar rations and indicators that are out of the scope of this article.

The good news for crypto analysts and investors is that these concepts are relatively straight forward to understand and very easy to obtain from sources such as Glassnode.

Remember there are no such a thing as Bear Markets, just periods of Transfer of Wealth from the Paper Hands to the Diamond Hands.

Yours in Crypto.