HOLD Cave: Telling the Story of Bitcoin's Growth Amid Volatility

Authors: Dhruv Bansal, Sam Bradbury and Stephen Hall, Unchained Capital; translation: Jinse Finance xiaozou

When Unchained was just getting started in 2016, we developed two diagrams that helped us structure our business strategy.

Two years later, we published the first of these charts in our first article in the Bitcoin Data Science series, popularizing the concept of the HODL Wave — buying Bitcoin at the peak of a bull market and holding it for years during the ensuing bear market . The graph itself shows the age distribution of the Bitcoin UTXO set, spreading the outputs into colorful age groups that ebb and flow over time.

The HODL Waves chart is a pillar of the Unchained strategy. We can intuitively see that long-term investors hold so much Bitcoin that we are convinced that there is a market for Bitcoin financial services. I've been relieved to see the term "HODL Wave" becoming a common phrase around Bitcoin, and data providers like Glassnode and Woobull replicating the HODL Waves graph.

Despite the success of HODL Waves, we have yet to publish the second graph we created in 2016, which guided our strategy for Bitcoin secured loan products.

Now, let's announce the second picture: Hold Cave

1**、HODL CaveIntroduction**

HODL Cave** The chart is designed to answer a simple question: "What has been the historical return for investors holding Bitcoin over a given period of time?"**

For example, the average return on holding Bitcoin for two years (orange line) is just under 25x and grows to 1000x after 6-7 years. In 90% of cases, holding Bitcoin for 2 years can have a positive return. Holding for another year increases that to 99%. People who have held Bitcoin for more than 5 years have never experienced a loss!

The market is well aware of the relationship between long-term holdings of Bitcoin and huge returns. Speculation on Bitcoin's "number go up" (price increase) technology was a big part of what initially attracted many investors. **This massive historic appreciation of Bitcoin is the hardest fact to explain for Bitcoin detractors. **

However, it is also clear from this that Bitcoin’s enormous volatility in the short and medium term. The average return on holding Bitcoin for two years could be 23x, and it is still possible (albeit less than 5%) to lose 50% of the initial investment.

Any investor considering holding Bitcoin who is not prepared to face such volatility will be left with two hands and forgoing their long-term gains in a bear market. **Honest bitcoin investors must make sure we tell any long-term growth story with the truth about bitcoin volatility. **

Many visualizations of bitcoin price history show either growth or volatility, but not both. HODL Cave is special because it allows us to see growth and volatility at the same time. **

2**, why is it called "Hold Cave"? **

In Plato's Allegory of the Cave, the prisoner in the cave, with his back to the firelight, takes false shadows of himself and things as reality. Leaving the cave to see real-world prisoners in bright light is painful. Some turned away in disbelief. The prisoners who returned to the cave, because their eyes had adapted to the outside light, could no longer see shadows. They told the prisoners who stayed in the cave the real situation outside the cave, but they didn't believe it. Instead, those who stayed believed that those who returned were blinded by their experiences outside. They began to violently resist any further movement out of the cave.

Plato's fable resonates with people who encounter unexpected resistance in sharing valuable new ideas that advance their personal growth. Holding Bitcoin for years has been such an experience, and we are not the first to use Plato's fable to describe holding Bitcoin. Long-term bitcoin investors have left the cave of fiat currency, believing that the existing system is fragile and unreal, just a shadow cast on the wall by the more fundamental reality of bitcoin. However, the broader market voice believes that Bitcoin investors have been blinded by the pain of the bear market and the dizzying highs of the bull market. **

We like the name "HODL Cave" for two more reasons. First, the chart data and the analysis it supports are correlated and complementary to the data of the HODL Waves chart, so the rhyming name is appropriate.

Second, the white space above and below the 100% dark blue area and the jagged nature of the financial time series combine to create the image of stalagmites and stalactites, localized price changes that sadden long-term holders on their way out of their caves. The line showing mean and median returns is like a rope, **statistically encouraging those stuck in local minima to persevere, while warning those in local maxima to surge that they too will eventually revert to the mean . **

3**, let's explore Cave! **

The entire HODL Cave chart tells the story of Bitcoin growing amid volatility. But the details of the story, the undulations at the bottom and top of the cave, the repeated cyclic transitions from tunnel to cave, these terrain changes tell a more subtle story that we'll explore below. You'll notice that below, we've switched to the version of the chart that started in 2013; this is largely because we don't expect the majority of Bitcoin holders to reap huge returns from Bitcoin's early price discovery.

(1**)Sudden ecstasy and pain**

The far left of the chart shows the tragic nature of short-term Bitcoin holdings.

Looking back at history, **holding Bitcoin for a few months is more of a gamble than an investment. **While average returns are slightly positive in the short term, the median hovers near zero returns and only starts to be positive between 4 and 6 month holdings. The middle 80% distribution ranges from losing 40% of your initial investment to losing three times as much.

For a few, however, the short-term swings were even more dramatic. In the history of Bitcoin, if you buy Bitcoin and hold it for 3 months, you may see a return of 10 times - or a loss of 70%. Imagine how a first-time Bitcoin investor would react differently to Bitcoin if they experienced such extreme volatility, and their subsequent attitudes.

The data suggests that some people reading this may not need to imagine - they've been there!

(2**) EXIT FANTASY**

The far right of the chart shows the crazy speculative fantasy on Bitcoin - investors who bought Bitcoin early and held it for more than 10 years have achieved huge (higher than 1000 times) returns. As tempting as extreme returns may be, there are several reasons to be skeptical of realizing the returns shown on the far right of the graph.

First, the exact magnitude of the return on the far right is extremely sensitive to the initial date chosen for the chart time period. The earlier the inception date, the more Bitcoin's price will rise during that time. The HODL Cave chart in 2010 when Bitcoin was less than $1 shows a return of 1000 times what the chart shows in 2013 when Bitcoin was near $100.

Second, the far right of the graph represents holding Bitcoin for the longest duration in the graph, so there are fewer such long duration windows in any given time period. For example, when charting a 10-year period, there are about 3,644 one-week windows, but only one window that lasts exactly 10 years (buy Bitcoin on the first day of the time period and hold it). Therefore, the number of averaging windows decreases linearly from left to right. So, the variance of the data on the far right of the graph (the height of the cave along the y-axis) is suppressed.

In the end, **saying that exiting a decade long bitcoin position for huge returns is an illusion, the biggest reason is that investors who have actually held bitcoin for a decade or more will not consider exiting bitcoin again . **Morpheus said it well:

"What are you trying to tell me? Can I make millions with my Bitcoin one day?"

"No. I'm trying to tell you that when you're ready...you don't have to.

(3**) THE CALE BETWEEN THE STORMS**

The Bitcoin halving occurs every 210,000 blocks. In theory, it should be every 4 years, but in practice the halving tends to happen slightly faster. Due to the halving, the price of Bitcoin goes through a roughly 4-year bear market cycle followed by a bull market. The HODL Cave chart neatly shows this market cycle.

In a given time period, the height of the graph (the distance between the cave floor and the top) is a measure of the distribution of total returns over that time period. Seen from left to right, "cave height" shrinks and grows over a nearly 4-year cycle. In the same cycle, the average return and the median return are sometimes close to each other and sometimes far away. Dizzying prices during bull markets are followed by massive sell-offs that lead to subsequent bear markets, which creates volatility. Over the next few years, volatility will subside as Bitcoin enters a period of relative calm, the calm between storms.

Thus, halvings not only cause cycles in Bitcoin price, but also cycles of volatility in Bitcoin price, which in turn lead to cycles in unrealized Bitcoin positions. This has real implications for investors. Bitcoin positions held for 4 or so years (or 8 or 12 years) with large unrealized gains or losses may quickly revert to mean levels.

The "top" of HODL Cave repeats approximately every 4 years, indicating that investors should "be careful" and prepare for downside market action. A "bottom" indicates that investors should "hold" for a little longer. In both cases, investors rely on the idea that unrealized gains/losses revert to the mean over a period.

(4**) AVOID RISK FLOODING CAVES**

Unchained is proud to offer a full suite of financial services to Bitcoin users today, including custody, trading, retirement, inheritance and loan products. But when we started our business in 2016, we only planned to launch one product: Bitcoin-secured USD loans.

We became the first company to offer secure, regulated bitcoin-backed loans to US bitcoin holders. But because we were the first to market, we had to face a lot of unknowns. The HODL Cave chart helped us a lot.

Mortgages typically use a loan-to-value ratio (LTV) to limit risk. For example, if a borrower puts up $100,000 in collateral, a lender might offer the borrower $50,000 in principal — or a 50% LTV. If the value of the collateral falls below a certain threshold, borrowers may be subject to a margin call, requiring them to post additional collateral or pay part of the principal.

The higher the LTV, the easier it is for borrowers to obtain liquidity (since they can put up less collateral), but as margin calls become more likely, the riskier and costlier the servicing process. In HODL Cave, the LTV of a particular loan can be thought of as a kind of "water mark". If the LTV is too low, the cavern will be dry with nothing to float on; borrowers will not have an incentive to borrow because the collateral requirements are too strict. If the LTV is too high, then the cave will be flooded and both borrowers and lenders will be drowned in the risk of too frequent margin calls.

When we first created the HODL Cave chart in 2016, we used it to set an LTV ratio of 50%. We believe that LTV provides the appropriate balance of value, cost, and risk among Unchained, our borrowers, and loan funding providers. The 50% LTV quickly became the industry standard.

As Bitcoin matures into another market cycle, we revisit our analysis. For 2021, we examined how the HODL Cave terrain has changed since 2016 and decided to reduce the LTV on all our new loans to 40%. Now thinking about the above point about the cyclicality of volatility, we drained the water because we felt the market was in the "careful" zone.

It turned out to be a wise decision. Together, we have weathered the 2022 bear market with no loan losses and virtually no liquidations by limiting the risk we and our clients take.

4**, cave exploration in your own Cave**

HODL Cave shows the distribution of returns for holding Bitcoin for a fixed period. If you’ve been holding Bitcoin for a while, you can use HODL Cave to visualize your rate of return and compare it to the returns of other holders of the same time.

But the shape and topography of a HODL Cave is sensitive to the time period you choose**, especially for longer term holdings. As discussed in the “Exiting the Fantasy” section above, the earlier the start time and the longer the time period, the more historical price appreciation Bitcoin has experienced, and the correspondingly greater divergence in final returns shown in HODL Cave.

If you want to compare your Bitcoin returns to the market, it is important to **choose a time period for HODL Cave that matches your own Bitcoin experience. For example, if you first heard about Bitcoin in 2017, your HODL Cave should be plotted using the time period from 2017 to the present. This graph will now show your bitcoin journey over the past few years, allowing you to more fairly compare your returns to other investors in your time period.

To help you draw your personal HODL Cave, we created the animation above, from 2010 to present. You can scroll to when you first got into Bitcoin and take a look at your own HODL cave and plan your future Bitcoin investments.

For example, in the custom chart below showing returns to Bitcoin holders in 2017, you can see something interesting:

· **As long as they are held for three years, almost all holders (more than 99%****) can make a profit. ** Among these bitcoin holders, those who have held for at least 5 years are profitable. Those who are still losing money after such a long **** HODL **** bought at the top of the market in 2017 **** and sold at the bottom of the most recent **** 2023 . **

Among this group, positions that are held for a year or so have the riskiest returns - they can hold for a year and time the market perfectly (up 1000%), or hold for a year and lose a lot (down 80% ).

If you are bitcoin holders in the 2021 bull market, your cave is indeed a dangerous cave. You are likely to be submerged underwater. Still, HODL Cave can help you paint a picture of how to start your caving here:

All holders are experiencing nominal declines since knowing Bitcoin in 2021.

With a few exceptions, over the past few years the only way to profitably buy Bitcoin was to be a short-term trader, but even the luckiest trades only provided a maximum of 2x returns.

· March 2021 to present, holding for more than a year is basically guaranteed to lose money - but as the cave deepens, averages and medians are about to emerge.