Bitcoin, the world’s most significant and popular cryptocurrency, has had its day in and out of the limelight for various reasons. Its price volatility, potential use cases, and scalability issues have been hot topics of debate. However, one aspect of the asset that has not received as much attention is the amount of bitcoin that is currently dormant. Latest data reveals that more bitcoin than ever is now dormant or inactive, leading to a question: What exactly does this mean, and what are its implications?
Dormant or inactive bitcoin refers to the units of the cryptocurrency that has not been moved for quite some time, typically at least one year. According to data from Glassnode, a blockchain analytics firm, approximately 60% of the entire bitcoin supply has been inactive for at least one year. This marks a new all-time high in the level of dormancy for bitcoin.
It is essential to understand the reasons behind this dormancy and how it can impact the cryptocurrency’s ecosystem. Dormancy can be a result of various factors, such as lost private keys, forgotten or abandoned wallets, long-term holding or ‘HODLing’ by investors, and even from coins being used as ‘store of value,’ similar to gold.
Lost private keys are a common reason for dormant bitcoins. It is estimated that around 20% of the total bitcoin supply may be out of circulation due to users losing their private keys or access to their bitcoin wallets. This is a significant concern, as the Bitcoin protocol has a hard cap of 21 million coins. With many bitcoins potentially lost forever, the available supply decreases, which could impact the cryptocurrency’s dynamics.
Another reason behind the dormancy is deliberate long-term holding, often called ‘HODLing,’ by investors who view bitcoin as a digital alternative to traditional investments like stocks or bonds. These individuals choose to hold their bitcoin as a long-term investment rather than using it for everyday transactions or short-term trading. This behavior aligns with the increasing belief that Bitcoin might serve as a hedge against the weakness in traditional financial markets and fiat currencies, especially amidst the current economic uncertainty due to the COVID-19 pandemic.
Furthermore, many view bitcoin as a ‘store of value’ like gold, in that an asset can retain its purchasing power over time amidst geopolitical and economic changes. As Bitcoin’s protocol has a built-in scarcity with its 21 million coin cap and halving events, it cannot be inflated like fiat currencies, which governments can print indefinitely. This characteristic positions Bitcoin as an attractive digital alternative for investors seeking stable store of value assets.
This rise in dormancy may also mean that the overall sentiment surrounding bitcoin is maturing, as the volatility typically associated with the cryptocurrency could potentially decrease. This can have a positive impact on the ecosystem, as it would mean that bitcoin is being used more as a form of value storage rather than speculative trading. Additionally, a reduction in volatility could lead to increased institutional interest as a stable and long-term investment.
However, high dormancy is not without its downsides. A large portion of the bitcoin supply being inactive could lead to potential market manipulation by a few whale investors. Since whales hold a vast amount of bitcoin, they can choose to manipulate prices by suddenly selling large quantities of the dormant bitcoin, causing prices to crash. This strategy can then be followed by buying back an even more substantial amount at cheaper price points, further consolidating their holdings and increasing the dormant supply.
Furthermore, high dormancy can also lead to liquidity issues in the bitcoin ecosystem. With a significant portion of the bitcoin supply being held and not readily available for trading or spending, it can lead to reduced market liquidity. Lower liquidity in the market can potentially lead to increased price volatility, which could turn away potential investors and hamper mainstream adoption.
In conclusion, the fact that more bitcoin than ever is dormant reflects a growing long-term interest in the cryptocurrency rather than simple speculation. This shift in sentiment provides evidence for the maturation of the bitcoin ecosystem and can serve as a building block for future institutional and mainstream adoption. However, stakeholders must address concerns such as price manipulation and liquidity to foster a stable and secure environment for the cryptocurrency. Ultimately, it remains to be seen how the market will adjust to and handle the increasing dormancy of bitcoin, and what it means for the future of the digital asset.
