Cointime And AVIV: "The Best Valuation Model For Bitcoin"

One of the most valuable features of Bitcoin is the transparency of the blockchain. As well as enabling anyone to trace and audit transactions, this property has allowed the development of a whole new suite of trading tools and metrics.

By parsing the blockchain, and comparing the information it provides with price and volume data from external sources, it's possible to create new models for gauging whether BTC is overpriced or underpriced at any given point. While these insights are never perfect, they can add further context to fundamental and technical analysis.

This blog looks at Cointime, a new metric developed by two blockchain researchers.

Recently two of my good friends, the head analyst at Glassnode (@_Checkmatey_) and head on-chain analyst at Ark Invest (@dpuellARK), created a new methodology to evaluate Bitcoin's economics called Cointime.

I've broken it down into simple digestible terms:

[THREAD 1/12]
— Will Clemente (@WClementeIII) August 28, 2023

Introducing Cointime

Cointime is similar to Bitcoin Days Destroyed, but uses blocks instead of days. Coinblocks = coins held x blocks held. Therefore, 5 BTC that is not moved for 1,000 blocks has a coinblocks measure of 5,000.

When coins are moved, coinblocks are destroyed. In the example above, those 5 BTC would no longer have a coinblocks of 5,000, but would start again at zero following the transaction. 5,000 coinblocks have been "destroyed".

Taking the Bitcoin network as a whole, a higher number of coinblocks destroyed indicates that more selling is taking place, and from longer-term holders, as coins are moved to exchanges from cold storage. A period of capitulation, or OG holders cashing out after leaving coins untouched for years, would result in a high coinblocks destroyed measure.

"Coinblocks stored" is the difference between coinblocks created in a given period of time, and coinblocks destroyed. Analyst Will Clemente summarizes how this can be used.

Now time for the fun stuff. Let's apply this to value Bitcoin.

First, understand the percentage of coinblocks created that have been destroyed is called "liveliness" and the remaining percentage is called "vaultedness". Together they = 100%.

Plot them both out and we get this: pic.twitter.com/k8rZYpXBtc
— Will Clemente (@WClementeIII) August 28, 2023

Liveliness and Vaultedness are multiplied by Bitcoin's total supply to give the total Active and Vaulted supply for the network. Finally, "Multiplying market cap by liveliness gives us active capitalization. Dividing this by investor cap (realized cap minus thermocap, which gives us the value stored in the network minus miners), gives us AVIV ratio."

AVIV ratio, maintains Clemente, is "the best valuation model for Bitcoin". The measure effectively simply compares BTC's actively traded supply with the amount of value stored in the network. As it happens, the ratio tends to oscillate around 1, spending roughly half the time above this and half below. As Glassnode notes, this makes it "a likely candidate for mean reversion analysis".

It should be fairly clear that AVIV bottoms coincide with BTC market bottoms, and tops coincide with tops (local or macro). Additionally, the 0.55 line is a relatively good bottom indicator, and 2.5 a good top indicator.

At present, the fact that this metric is trending upwards might give some confidence to traders who are uncertain whether BTC might experience another major drawdown, or even whether $15,500 was the bottom, back in November 2022. However, its real value may come in another couple of years, when it's time to start looking for top signals.

You can find the Cointime white paper on the Ark Invest website.

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