{"id":13201,"date":"2021-11-10T01:00:00","date_gmt":"2021-11-10T01:00:00","guid":{"rendered":"http:\/\/ci0291d3cef0002559"},"modified":"2025-01-29T13:51:08","modified_gmt":"2025-01-29T13:51:08","slug":"measuring-conviction-bitcoin-holders-reserve-risk","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/measuring-conviction-bitcoin-holders-reserve-risk","title":{"rendered":"Measuring Conviction Of Bitcoin Holders With Reserve Risk"},"content":{"rendered":"<div id=\"bsf_rt_marker\"><\/div><p><strong><em>The below is from a recent edition of the Deep Dive, Bitcoin Magazine&#8217;s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, <\/em><a href=\"https:\/\/members.bitcoinmagazine.com\/\"><em>subscribe now<\/em><\/a><em>.<\/em><\/strong><\/p>\n<p>In today&#8217;s Daily Dive we will take an in-depth look at Reserve Risk.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/bitcoin-reserve-risk.png\" title=\"\"><\/figure>\n<p>Reserve risk is a metric founded by <a href=\"https:\/\/www.kanaandkatana.com\/team-bios\/hans-hauge\" target=\"_blank\" rel=\"noopener\">Hans Hauge<\/a>, and it is a cyclical market indicator which aims to quantify the risk\/reward of allocating to bitcoin based on the conviction of long-term holders. Simply, reserve risk is a ratio between the current price of bitcoin and the conviction of long-term holders. The current price can be thought of as the incentive to sell, and the conviction of long-term holders\/investors can be quantified as the opportunity cost of not selling. <\/p>\n<p>We will more thoroughly describe and quantify these metrics further along in the piece. <\/p>\n<p>The following is an <a href=\"https:\/\/academy.glassnode.com\/indicators\/coin-days-destroyed\/reserve-risk\" target=\"_blank\" rel=\"noopener\">excerpt from Glassnode Insights<\/a>:<\/p>\n<p><em>&#8220;The general principles that underpin reserve risk are as follows:<\/em><\/p>\n<ul>\n<li><em>Every coin that is not spent accumulates coin-days which quantify how long it has been dormant. This is good tool for measuring the conviction of strong hand HODLers.<\/em><\/li>\n<li><em>As price increases, the incentive to sell and realise these profits also increases. As a result, we typically see HODLers spending their coins as bull markets progress.<\/em><\/li>\n<li><em>Stronger hands will resist the temptation to sell and this collective action builds up an &#8216;opportunity cost.&#8217; Everyday HODLers actively decide NOT to sell increases the cumulative unspent &#8216;opportunity cost&#8217; (called the HODL bank).<\/em><\/li>\n<li><em>Reserve Risk takes the ratio between the current price (incentive to sell) and this cumulative &#8216;opportunity cost&#8217; (HODL bank). In other words, Reserve Risk compares the incentive to sell, to the strength of HODLers who have resisted the temptation.&#8221;<\/em><\/li>\n<\/ul>\n<p>Reserve Risk is <em><strong>low<\/strong><\/em> when HODLer conviction is high (unspent opportunity cost is high and increasing), and price is low. <\/p>\n<p>Reserve Risk is <em><strong>high<\/strong><\/em> when HODLer conviction is low (unspent opportunity cost is low) and price is high.&nbsp;<\/p>\n<h2>Reserve Risk Calculation<\/h2>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/reserve-risk-calculation.png\" title=\"\"><\/figure>\n<p>As shown in the graphic above, reserve risk is defined as \u201cprice\u201d divided by \u201cHODL bank.\u201d While price obviously doesn&#8217;t need an explanation, what is HODL bank, and what signal does it provide? <\/p>\n<p>As stated earlier, reserve risk is a ratio of the incentive to sell and the opportunity cost of not selling. HODL bank quantifies this \u201copportunity cost of not selling.\u201d<\/p>\n<h2>Coin Days Destroyed&nbsp;<\/h2>\n<p>In <a href=\"https:\/\/deepdivebtc.substack.com\/p\/the-daily-dive-050-an-examination\" target=\"_blank\" rel=\"noopener\">prior Daily Dives<\/a>, we have covered coin days destroyed (CDD) as an on-chain metric, so we won\u2019t cover it extensively here, but readers can find additional information on <a href=\"https:\/\/www.kanaandkatana.com\/valuation-depot-contents\/2019\/5\/30\/exploration-of-bitcoin-days-destroyed\" target=\"_blank\" rel=\"noopener\">CDD here<\/a>. <\/p>\n<p>Essentially, with the complete transparency of the Bitcoin blockchain, one can see how many days each and every coin has been held and\/or spent. When there is a large number of CDD on a particular day, it shows old coins are being spent\/changing hands. Further, if we divide CDD by circulating supply, we can standardize the metric for an increasing circulating supply over time.&nbsp;<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/supply-adjusted-coin-days-destroyed.png\" title=\"\"><\/figure>\n<p>While the stand-alone metric of supply-adjusted CDD itself doesn&#8217;t provide much signal if any, it serves as a key input for reserve risk, and here&#8217;s how:<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/usd-value-of-bitcoin-supply.png\" title=\"\"><\/figure>\n<figure><img decoding=\"async\" src=\"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/deep-dive-25-promo.jpg\" title=\"\"><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Reserve risk is a ratio between the current price of bitcoin and the conviction of long-term holders.<\/p>\n","protected":false},"author":2539,"featured_media":5980,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34],"tags":[85,864,2335],"class_list":["post-13201","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","tag-bitcoin-magazine-pro","tag-hodlers","tag-reserve-risk"],"author_data":{"id":2539,"name":"Dylan Leclair","nicename":"dylan-leclair","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/01\/dylanheadshot-edited-96x96.png"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/img_6308.png","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/13201","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/2539"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=13201"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/13201\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/5980"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=13201"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=13201"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=13201"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}