On-chain analysts at Glassnode and Ark have developed a new framework for analyzing the Bitcoin network’s “economic state.”
The framework, called “Cointime Economics (CE),” will help increase the accuracy of on-chain analysis, which savvy investors and traders often use to read where Bitcoin’s price is heading.
What is Cointime Economics?
According to lead Glassnode analyst James Check, CE moves away from analysis based on Bitcoin’s unspent transaction outputs (UTXOs), which “zeroes in on individual transaction outputs and requires extensive datasets.”
Instead, the framework uses a new unit of time measurement called “Coinblocks,” which are created every time a new Bitcoin block is added to the network. Then, as Bitcoin UTXOs are spent, the Coinblocks within them are destroyed.
As a formula, Ark’s separate report on the matter describes Coinblocks as “coin volume times blocks held.”
“At a macro scale, the aggregate state of the network is defined by Liveliness and Vaultedness, describing the relative activity and inactivity of the supply, respectively,” wrote Check in a blog post on the subject.
The measurement breaks down Bitcoin’s supply into two components: “Active” and “Vaulted” (inactive) supply. These become new reference points for economic calculations, such as “inflation rates, vaulting rates, and stock-to-flow ratios.”
For example, Bitcoin’s “inflation rate” is traditionally calculated “by dividing annualized issuance by total outstanding supply,” according to ARK. When incorporating CE, however, the inflation rate weighs in the ratio of active supply to vaulted supply by multiplying the former inflation measurement by this ratio.
As of May 7, 2023, the nominal Bitcoin inflation rate stood at 1.64%, while the cointime-adjusted inflation rate was 2.48%.
What is Cointime Good For?
CE provides a key advantage over previous forms of analysis by amplifying the economic impacts of “truly active supply” while reducing the impact of long vaulted supply, which likely includes lost coins.
In an email to CryptoPotato, Check explained how Satoshi’s long-lost Bitcoin stash has long impacted measurements for commonly used metrics such as realized price – a calculation of Bitcoin’s average coin price based on the last time every network coin was transacted.
“The $35B in profit held by Satoshi is offsetting the $35B in losses by 2021 top buyers in order for MVRV to give us a ‘break-even’ level of 1.0,” wrote Check. “We are missing the damage within the active and economically meaningful supply.”
Check noted that CE allows analysts to account for lost coins using “simple mathematics” without any “need to know which coins are actually lost.”