In this week’s Glassnode on-chain Bitcoin analysis we will be looking at Bitcoins Realized HODL Ratio Indicator (HODLRI). The HODLRI has managed to successfully provide sell signals at every BTC top, and buy signals at every BTC bottom. The HODLRI is widely considered to be one of the top on-chain indicators. Firstly let’s run through how the indicator works.
BTC/USD HODLRI over time
How the HODLRI works
The HODLRI works through the utilisation of different aged UTXO`s, weighted through various realized values.
What is a UTXO?
UTXO is an unspent transaction output system which multiple cryptocurrencies use such as Digibyte and BTC. It is used to store change from cryptocurrency transactions and allows for spending to take place across multiple bytes of data.
When a wallet is created there are no transactions on it. For example if you create a MetaMask wallet, there will be no cryptocurrencies on the wallet, hence no transactions. However as you use the wallet, by spending, receiving and HODLing cryptocurrencies the number of transactions on your wallet will increase.
If you are holding 3 BTC in your MetaMask wallet and want to send 1.3 BTC, you can do so due to the UTXO database. Rather than 1.3 BTC being sent in one go, it could be sent over multiple bytes of data:
Sending 1.3 BTC
- Data one – 0.3 BTC
- Data two – 0.1 BTC
- Data three – 0.6 BTC
- Data four – 0.15 BTC
- Data five – 0.15 BTC
Having sent 1.3 BTC from the 3 BTC wallet, the user now has 1.7 BTC remaining as it is the amount of BTC left in a wallet after the transaction has been executed. Now that the BTC has been spent, the record of the transaction remains on the ledger.
User one = 1.3 BTC
User two = 1.7 BTC
The UTXO ensures that Bitcoin is not simply `created`. UTXO is used in PoW consensus algorithms.
Learn more about the changing consensus algorithms with the top 10 cryptocurrencies over time.
What is realized value?
Realized value is the price of coins at the time when they moved from their wallet to another one. For example, if Tommy moved 1 BTC on 17/10/2020 in order to HODL, the realized value will be $11,200 USD (price of BTC on 17/10/2020). However, Katy moved 1 BTC to another wallet in order to HODL on 18/03/2020 with a realized value of $5,200 USD (price of BTC on 18/03/2020 was $5,200 USD).
Therefore one part of the HODLRI which we are looking at is the varying realized value of UTXOs. We can group UTXOs by age, this then creates HODL waves (as shown below).
BTC/USD HODL waves
In the chart above we can see the fluctuation of BTC holdings and how long various wallets have held BTC. However, it should be noted that the HODL waves shown above are not weighted by their realized value.
Back to the HODLRI definition
- Realized = Realised value of the UXTOs.
- HODL = The length of time which these UTXOs have been held for in their wallets.
- Ratio = Comparing the varying lengths of time which users are HODLing BTC in order to determine whether the market is overheated or cooled off.
- Indicator = Through the ratio creating a line which can then be used as an indicator.
The HODLRI ratio
HODRLI = RHODL 1 week / RHODL 1yr – 2yr * market age
Effectively the ratio looks at the movement of coins on a short timeframe vs a longer timeframe. Additionally, it considers the Lindy effect, ensuring that lost / forgotten BTCs are accounted for.
The result of all of this is an indicator which has historically pointed out all the tops and bottoms of the market.
How to read the HODLRI
The HODLRI has three zones: the red zone, neutral zone and green zone. The indicator may be relatively complicated to wrap your head around, although thankfully it is quite easy to use.
The green zone
The green zone is the buy zone for BTC as the market has majorly cooled off. BTC has reached the buy zone four times in its history, as shown below.
|Cryptocurrency||Data when BTC entered the green zone||Price when BTC entered the green zone|
Green zone entry points
The neutral zone
This is when BTC is currently in the transition of heading towards either a green or red zone. If BTC has just exited a green zone, it is looking towards the red zone and vice versa.
The red zone
The red zone indicates that it is time for BTC HODLers to take profit and exit their positions due to the market being overheated. BTC has hit the red zone three times in history, each time proceeding to hit the green zone.
|Date when BTC entered green zone||Price||Date when BTC entered red zone||Price|
|27/12/18||$3,659 USD||N/A||At time of writing BTC is at $39,300 USD|
Red zone exit points
Profitability of this indicator
In the chart below we can see that this indicator has been extremely profitable since 2011. However it must be noted that this indicator was created around 2019. It has yet to weather the test of time. Nevertheless, so far it has been superb.
Like all indicators it should not be considered a holy grail. One day it will fail and give a false reading. However, so far it has been highly accurate.
Indicators to use alongside the RHODLI are:
- Puell Multiple
- RSI (daily and weekly time frame when sell or buy indications are triggered)