Spotlight on: Bitcoin days destroyed

Tuesday 31 March 2015

Spotlight on… takes a closer, slightly nerdier look at crypto terms, technologies and services, and their significance.

You might have heard the term ‘bitcoin days destroyed’ and wondered what it meant. Or you might know what it means but not have a clue about its significance. Here’s a quick rundown of this slightly odd metric of bitcoin activity…

Boom!

Bitcoin economics
By its nature, adoption means people using bitcoin. And that means people sending bitcoin. Every transaction, such as a purchase, requires bitcoins moving from one address on the blockchain to another. That’s the deal with bitcoin. If you can’t see it on the blockchain, it didn’t happen.

So you might think that a reasonable measure of how much activity is going on in the bitcoin ecosystem would be to find out how many bitcoins are moving from one address to another every day. You’d be right, up to a point, but unfortunately it’s not that simple.

Bitcoin is easy to move around. Really easy. It’s extremely fast and extremely cheap to create a new address, or a dozen new addresses, and split a large transaction among them. Let’s say I get paid 1 bitcoin for a piece of work I’ve just completed. Bam. One bitcoin has moved from the buyer’s address to the seller’s (mine). But what happens after that? Perhaps I send half to an exchange to cash it out for fiat - that’s another half a bitcoin moving. The other half goes out of my ‘current’ account into an address I used for making purchases and keeping a few coins on hand for the medium term. On second thoughts, while I’m in there I decide that the market’s low at the moment and this is a good time to put a 5 BTC chunk of my recent earnings aside in cold storage, to keep them safe for a couple of years in the hope that they’ll appreciate nicely.

Very little of this involves actual economic activity. It’s just moving coins from one address to another. It’s just accountancy. Only the first transaction, from the buyer, represents work actually done.

Bitcoin days destroyed

Days destroyed
Bitcoin days destroyed takes into account the age of the coins that are moving. If a bitcoin has been in an account for one day before it’s sent somewhere else, that’s one day destroyed. If it’s been in a cold storage account for a year and it’s moved, that’s 365 days destroyed.

The effect of this is to mute the impact of the day-to-day churn of bitcoins that move around the blockchain but don’t reflect any real economic purpose. Instead of total transaction volume, transactions are weighted by how long the coins have been sat still.

It’s not a perfect measure, by any stretch. There are businesses that might do a high volume of transactions - and conversely, coins may be moved from old wallets into new addresses without doing anything more productive. However, it’s arguably a much more reliable indicator of the health of the bitcoin ecosystem and the amount of genuine activity that’s going on.

A look at the graph shows that bitcoin activity is still concentrated around certain days - generally sharp market movements when speculators are sending their coins to and from exchanges. As time goes on, we’d expect to see those peaks smooth out, reflecting more constant churn of coins from customer to merchant to exchange and back to customer.


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