Bitcoin's 'Reserve Risk' Suggests Opportunity for Long-Term Accumulation

The indicator trades at low levels when there is heavy investor accumulation and HODLing is the preferred market strategy, a blockchain analytics firm said.

AccessTimeIconApr 5, 2022 at 10:18 a.m. UTC
Updated May 11, 2023 at 5:27 p.m. UTC

Bitcoin's (BTC) current valuation perhaps presents patient investors with an attractive opportunity to take exposure to the world's largest cryptocurrency.

That's the signal from an indicator called Reserve Risk, which measures the risk-reward ratio of allocating to bitcoin based on the conviction of long-term holders. The metric compares the incentive to sell offered by the going market price to long-term holders resisting the temptation to liquidate.

Reserve Risk stood at 0.0024 at press time, having found acceptance under the green zone below 0.0027 in late January. The risk-reward ratio is considered attractive when the metric hovers in the green area.

"This metric will trade at low levels when there is heavy investor accumulation and HODLing is the preferred market strategy," blockchain analytics firm Glassnode's weekly newsletter published Monday said.

In other words, a low reading indicates that conviction among HODLers – slang from long-term crypto investors – is high and they refuse to spend their coins. Therefore, there is an attractive risk/reward for prospective buyers to dip their toes into the market.

However, in the past, Reserve Risk has hovered in the green zone for prolonged periods, marking a slow transition from the final phase of the bear market to the mid-stages of a bull market. So, investors looking to add exposure to bitcoin, tracking the low Reserve Risk need to be patient or have the ability to endure long periods of underperformance before big returns manifest.

"Reserve Risk has traded at historically undervalued levels for 77 days so far, although this is far shorter than the multi-year periods seen in 2015-17 and 2018-20. Note, however, that Reserve Risk generally signals undervaluation well into the bull market as HODLers typically commence distribution only after a new price [all-time high] is set," Glassnode's weekly report said.

Bitcoin was trading largely unchanged on the day at $46,600 at press time, according to CoinDesk data.

Bitcoin's Reserve Risk Indicator (Glassnode)
Bitcoin's Reserve Risk Indicator (Glassnode)

Reserve risk is calculated by dividing bitcoin's price at any point in time by the "HODL Bank," as detailed by Glassnode, which represents the opportunity cost of holding an asset. "Each day a coin is held, the owner defers the ability to exchange it for its cash value," according to Glassnode.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.