Bitcoin Days Destroyed (BDD) Explained !!
Bitcoin Days Destroyed (BDD) is a fascinating concept.
It took me some time to realize the full significance of the concept as it is not obvious to understand such kind of metrics.
The concept is smart. You cannot use traditional methods to measure such things in Bitcoin. By such things, I mean the level of economic activity happening on Bitcoin’s blockchain.
As a general belief, we think the level of economic activity happening over Bitcoin’s blockchain is best captured by the daily/weekly/monthly transaction volume.
But this metric alone doesn’t give you the real picture.
Economic activity is also best explained by velocity. In traditional sense velocity of money gives the actual picture of the level of economic activity generated by particular units of currency.
For example, if I give you a $10 for some service, and then you give that $10 to a grocery owner the next day and the grocery owner gives that $10 to an electrician the third day than that $10 bill has generated and economic activity of $30 in 3 days.
BDD explains a similar thing in the realm of Bitcoin because transaction volume can be misleading.
Let’s understand how that can be misleading before understanding BDD because this will help you appreciate BDD more.
For example, let say one person is just transferring 1 BTC from one address to another address for 3 consecutive days. Can you say that this particular 1 BTC has created economic activity 3 BTC like in earlier case we saw how $10 bill created and economic activity of $30?
Simply the answer is NO.
That’s because this 1 BTC has just remained with one person all the time and was simply changing addresses. But every time this 1 BTC moves, the volume is registered. That’s why the volume of actual money changing hands or owners cannot be found this way and hence is misleading.
It obscures the actual volume or activity actually happening with that 1 BTC.
This is made simple by Bitcoin Days Destroyed !!
What Are Bitcoin Days Destroyed?
Bitcoin days destroyed the number of bitcoins multiplied by the number of days since the coins moved/spent last from an address.
For example, if I have 7 bitcoins that I have held for 10 days already and I am moving them now, it means 70 BDD (7 BTC * 10 days = 7 BDD). So I have destroyed 70 bitcoin days.
However, it doesn’t literally means that bitcoins are destroyed. It is instead a metrics to measure the age and maturity of coins with some time scale.
Of course, not to mention that these coins are either moved to another address controlled by the same owner or are moved to exchange for being sold or to purchase lambos, etc.
But now since they are moved the actual economic activity created by them is 7 BTC only. It doesn’t matter that if one of these coins is spent on grocery or booking hotels and other coins sent to the same owner on a new address.
Now let say 1 BTC out of the 7 BTC is with a grocery owner and the owner keeps this for 100 days. Then the Bitcoin days destroyed by this particular coin is (1 BTC * 100) = 100 BDD when the grocery owner moves this on the 100th day.
But even this model has a flaw.
Adjusted BDD: Coin Days Destroyed
Even in this model, big exchanges who move a large number of bitcoins on address controlled by them or individuals moving large amounts themselves still dilutes the economic activity.
For resolving that Adjusted BDD metric is used:
Adjusted BDD = BDD / Circulating Supply
And this was accounts for that redundancy and gives a clear picture of actual economic activity. This metrics also explains how the long term HODLers, i.e., mature investors, are every time able to sell their Bitcoin at the top of the market.
Furthermore, this metric can be used to extrapolate the demand of UTXOs and predict the future price of Bitcoin in tandem with the upcoming Bitcoin halving.
So, in summary:
The idea of “bitcoin days destroyed” came about because it was realized that total transaction volume per day might be an inappropriate measure of the level of economic activity in Bitcoin.
After all, someone could be sending the same money back and forth between their own addresses repeatedly. If you sent the same 50 BTC back and forth 20 times, it would look like 1000 BTC worth of activity, while in fact, it represents almost nothing in terms of real transaction volume.
With “bitcoin days destroyed”, the idea is instead to give more weight to coins which haven’t been spent in a while.
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