Amidst an extended period of bearish market conditions, a new conceptual framework aimed at comprehending the Bitcoin economy was unveiled on Thursday.
The whitepaper titled “Cointime Economics: A New Framework for Bitcoin On-chain Analysis” was co-authored by David Puell, a research associate for ARK Invest, and James Check, the lead analyst for Glassnode.
Check stated that the whitepaper introduces a “toolkit to properly understand the economic realities of Bitcoin” and presents a fresh perspective for evaluating the market.
The whitepaper delves into the distinctions between the current unspent transaction output (UTXO) and a novel “cointime” model designed to capture the “real economic weight of a Bitcoin.”
Cointime economics approaches Bitcoin from a temporal viewpoint, suggesting that Bitcoin’s significance is linked to the most recent movement of a coin. The model introduces the concept of a “coinblock,” which essentially multiplies the number of Bitcoins by the number of blocks produced while the Bitcoin remains dormant.
For instance, possessing 10 coins during the time taken to generate 10 blocks equates to 100 coinblocks.
The report clarifies that significant coinblock destruction indicates that long-term holders are selling – colloquially referred to as Bitcoin’s “smart money.” These holders usually possess larger Bitcoin balances and trade from lower cost bases, thereby generating greater profits.
The whitepaper proposes two new metrics for assessing Bitcoin’s economic state: “Liveliness,” which gauges the network’s activity by tracking how often coins have been moved or “destroyed,” and “Vaultedness,” which measures the stored or “inactive” coins within the protocol.
The authors argue that the Cointime framework offers a consistent mathematical approach for assessing the economic importance of each Bitcoin over time.
Check highlighted that unlike traditional Unspent Transaction Output (UTXO) analysis, which necessitates specialized data engineering, Cointime offers a macroscopic perspective that is straightforward to calculate and replicate without proprietary data science.
In the Cointime model, Check notes that the bear market is more severe than anticipated. He explains that due to the presence of lost coins mainly from the early years, these coins hold substantial unrealized profits. However, when models like realized price are utilized, the losses held by active investors are masked by the gains held by lost coins.
According to the Cointime model, the market’s actual cost basis is approximately $32,000, which is still below the current value.
The co-authors emphasize several benefits of cointime economics, including reevaluating Bitcoin’s inflation rate and the network’s valuation. Check suggests that the framework has value for both on-chain analysts looking for new insights and institutional investors seeking simplified models with higher signal.
In conclusion, the authors assert that they’ve developed a simple mathematical toolkit that facilitates superior economic and valuation models, accounting for both the supply and demand aspects of the market.