Unpacking Bitcoin's Declining Velocity: A Sign of Maturation

Bitcoin's on-chain velocity, which measures the frequency of coin movements, has reached a decade-low. This decline could be perceived as a warning sign, suggesting that Bitcoin has lost momentum. However, it may actually signify that the cryptocurrency is maturing, with users increasingly holding it as a long-term asset rather than using it for short-term transactions. A significant portion of Bitcoin, over 70%, has not moved in over a year, indicating a shift in user behavior. This change is largely driven by institutional adoption, with spot ETFs holding over 1.298 million BTC and total institutional holdings approaching 2.55 million BTC. As a result, the supply of circulating Bitcoin is being locked up, driving scarcity and potentially boosting prices. Nevertheless, this trend also lowers on-chain velocity, as fewer coins are being transacted. It is essential to note that on-chain velocity only captures a part of Bitcoin's economic activity, as a substantial amount of transactions occur off-chain, such as on the Lightning Network and through Wrapped Bitcoin. The growth of these off-chain solutions, including a 400% increase in Lightning Network capacity and a 34% rise in WBTC supply, suggests that Bitcoin's utility is expanding beyond traditional velocity metrics. The decreasing on-chain velocity may not necessarily mean that Bitcoin's usage is slowing down; instead, it could indicate that the cryptocurrency is evolving into a multi-layered monetary system, requiring new methods to measure its momentum. The trade-off behind low velocity is that it can lead to reduced fees for miners, potentially impacting the network's security model. Furthermore, a network with low coin movement may be perceived as a static vault rather than a dynamic marketplace, which could weaken the vision of Bitcoin as a usable currency. Ultimately, the decline in velocity is a sign of Bitcoin's maturation, as users are increasingly holding it as a store of value rather than using it for transactions. As the Bitcoin network continues to evolve, velocity will remain an essential metric, offering insights into the cryptocurrency's future role in the financial system.