Velocity measures how frequently Bitcoin moves within a given period. It’s calculated by dividing the total transaction value by the average supply of Bitcoin. Higher velocity indicates heavier Bitcoin usage in transactions, while lower velocity suggests reduced activity and a growing preference for holding BTC.
While velocity might sound too abstract to provide any significant value when analyzing the market, it offers important insight into the economic role Bitcoin plays in the market. Essentially, it shows whether Bitcoin is used as a medium of exchange and/or speculation or a store of value. When analyzed alongside price, velocity helps us paint a very nuanced picture of the market.
There has been a significant drop in Bitcoin’s velocity since 2022, with the drop exacerbating in 2024. The persistent drop we’ve seen this year pushed velocity down to 14.9—levels not seen since 2011. This drop in velocity shows a significant reduction in Bitcoin’s on-chain transactional activity.
Graph showing Bitcoin’s velocity from 2009 to 2024 (Source: CryptoQuant)Velocity began dropping significantly in November in anticipation of the US Presidential elections. The election frenzy likely contributed to reduced on-chain activity as the market shifted from trading Bitcoin to accumulating and holding it in anticipation of volatility. This drop in velocity confirms the broader consensus about market maturity, which sees Bitcoin increasingly used as a hedge against economic and geopolitical uncertainties.
Graph showing Bitcoin’s velocity from Sep. 1 to Dec. 10, 2024 (Source: CryptoQuant)The current drop in velocity suggests that the market is transitioning from speculative trading to longer-term holding and strategic accumulation. However, this decline sharply contrasts Bitcoin’s price, which has seen explosive upward movement since November and reached its all-time high of over $101,000 last week. This decoupling of price and velocity shows Bitcoin’s rally was most likely driven by external factors, such as institutional demand, rather than increased transactions on the network.
The spike in institutional demand can clearly be seen through the spike in derivatives trading and demand for spot Bitcoin ETFs we’ve seen in the past few months. Derivatives have seen a sharp rise in volume and open interest, resulting from a significant growth of speculative activity.
However, high trading volumes in derivatives markets typically dampen velocity because these instruments allow traders to gain exposure to Bitcoin price movements without directly transacting in Bitcoin.
Futures and options are settled off-chain and often involve cash settlements, reducing the need for Bitcoin to move on-chain. This decoupling of price exposure from physical transactions diminishes on-chain activity, further suppressing velocity.
Graph showing the open interest and trading volume for Bitcoin futures in 2024 (Source: CoinGlass)The growing demand for spot Bitcoin ETFs has similarly affected velocity. Spot ETFs require the accumulation of physical Bitcoin, often stored in custodial wallets, to back the fund’s shares. While the initial accumulation phase may cause a temporary increase in on-chain transactions—like the spike in velocity we saw in early September and early December—the subsequent storage of Bitcoin in cold wallets significantly reduces its movement in the market. This confirms the shift toward institutional adoption, where large quantities of Bitcoin are effectively removed from circulation, further lowering velocity.
The rapid growth of Bitcoin ETFs, which now hold over 1.1 million BTC, shows passive investment vehicles are beginning to drive demand. This is why the influx of ETF-driven demand, crossing $1 billion in December, contributed to Bitcoin’s price surge but has not translated into higher on-chain activity.
Graph showing the total holdings of Bitcoin trusts and ETFs in 2024 (Source: CryptoQuant)Data shows that Bitcoin’s price and usage are now more influenced by institutional adoption and speculative financial products than by its use as a medium of exchange.
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