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When Unchained was just getting started in 2016, we made two plots that helped us frame our business strategy.
We published the first of these plots two years later in the first article in the Bitcoin Data Science series. This article popularized the concept of a HODL Wave—a cohort of bitcoin bought at the peak of a bull run which is held for years through the subsequent bear market. The plot itself showed the age distribution of bitcoin’s UTXO set, splitting outputs across colorful, age-based cohorts which ebb and flow into each other over time.
The HODL Waves plot was an anchor of Unchained’s strategy. Being able to see—visually—that so much of bitcoin is held by long-term investors convinced us there was a market for bitcoin financial services. Watching the phrase “HODL Wave” enter common bitcoin parlance and data providers such as Glassnode and Woobull replicate the HODL Waves plot has been gratifying.
Despite the success of HODL Waves, we have yet to publish the second plot we made in 2016, a plot which guided the strategy of our bitcoin-backed loans product.
Until today!
A “HODL Cave” plot is meant to answer a simple question: “What is the spread of historical returns of investors who held bitcoin over a given duration?”
Each point on the horizontal (x) axis represents holding bitcoin for some fixed duration of time—spanning from days on the left to more than a decade on the right. On the vertical (y) axis are plotted statistics of historical returns averaged across all windows of the given holding duration (within the overall time period). There are many more possible windows of short duration than long, so the number of samples being averaged decreases linearly as duration increases. Windows of a given duration are all averaged with the same weight, regardless of the absolute time at which they occur so early and late windows contribute equally to the statistics of returns.
For example, the mean return (orange line) from holding bitcoin for two years is just less than 25x and grows to 1000x after 6-7 years. In 90% of cases, holding bitcoin for 2 years yields a positive return. Holding for an additional year increases this to 99%. No one who has held bitcoin for more than 5 years has ever experienced a loss!
The correlation between holding bitcoin for a long duration and having outsized returns is well understood by the market. Speculating on the “number go up” technology of bitcoin is a big part of what initially attracts many investors. For bitcoin detractors, this massive historical appreciation in value is the hardest fact about bitcoin to explain away.
A slice showing the returns of two-year holds based on data from 2013 to now. Two-year holds over the course of bitcoin's history have generally done well! The median return is over 4x and the mean return is over 23x.
Yet bitcoin’s tremendous short and medium-term volatility is also clear from this plot. The mean return for holding bitcoin for two years might be 23x but there was still a chance (albeit <5%) that you could have lost 50% of your initial investment.
Any investor contemplating holding bitcoin who is not prepared for this volatility is going to have weak hands and surrender their long-term gains in bear markets. Ethical bitcoiners must ensure that we temper any long-term growth story with the truth about bitcoin’s volatility.
Many visualizations of bitcoin’s price history show growth or volatility but not both. The HODL Cave is special because it lets us see both growth and volatility together.
In Plato’s Allegory of the Cave, prisoners in a cave experience a false reality of shadows made by light cast by more fundamental forms. Prisoners who leave the cave and see the real world experience physical pain from the bright light. Some turn away in disbelief. Prisoners who return to the cave, their eyes having adjusted to the light, no longer see the shadows. They tell the prisoners who stayed behind about the reality outside the cave but they aren’t believed. Instead, those who stayed view those who returned as blinded by their journey. They begin to violently resist any further initiatives to leave the cave.
Plato’s allegory resonates with anyone who has experienced unexpected resistance when sharing a valuable new understanding that led them to personal growth. Holding bitcoin for many years is exactly this kind of experience and we’re not the first to frame holding bitcoin using Plato’s allegory. Long-term bitcoin investors, having left the fiat cave, view existing systems as brittle and unreal, mere shadows on the wall of the more fundamental reality of bitcoin. Yet the broader market views bitcoiners as blinded by experiencing the pain of bear markets and the dizzying highs of bull runs.
There are also two more reasons we like the name “HODL Cave”. First, the data plotted and the analyses it allows are related and complementary to those of the HODL Waves plot so it’s appropriate that the names rhyme.
Second, the negative space above and below the 100% dark blue band and the jagged nature of financial time series combine to create the impression of stalagmites and stalactites, local price variations that grief long-term holders on their journey out of the cave. The lines showing mean and median returns become ropes strung along the way, statistical encouragement for those stuck in a local minimum to hang in there as well as warning to those soaring at a local maximum that they, too, must eventually revert to the mean.
The overall HODL Cave plot represents the bitcoin narrative of growth in the presence of volatility. But the details of the plot, the undulations of the cave’s floor and ceiling, its periodic transition from tunnel to cavern and back again—this topography illustrates more nuanced stories which we explore below. You'll note that for the remainder of the article we switched to a version of the chart that starts in 2013; this is primarily because we expect the majority of bitcoin holders did not experience the outsized returns from bitcoin's early price discovery.
The far left-hand side of the plot exhibits the harrowing nature of short-term bitcoin ownership.
The mean return for short duration holds skew positive, but holding bitcoin for a single digit number of months can be just as miserable as it is euphoric.
Holding bitcoin for just a few months has historically been closer to gambling than investment. While the mean return skews slightly positive for short durations, the median hovers near zero return, only beginning to skew positive between 4 and 6 months. The middle 80% of the distribution spans all the way from losing 40% of your initial allocation to tripling it (3x).
For a chosen few, however, this short-term volatility is even more dramatic. There are days in bitcoin’s history where, if you bought and held for 3 months, you could see 10x returns—or lose 70%. Imagine the difference in reactions and subsequent attitudes towards bitcoin between investors whose first experience holding bitcoin was either extreme.
The data suggests that some of those reading this may not need to imagine—they lived these experiences!
The far right-hand side of the plot illustrates the crazy speculative fantasy of bitcoin—massive (>1,000x) returns that accrue from having bought bitcoin early and held it for more than a decade. Although such extreme returns can be tantalizing, there are several reasons to be skeptical about realizing the returns shown on the far right of the plot.
Looking at the visualization for any time period shows the number of windows sampled decrease from left to right.
First, the exact magnitudes of returns on this far right side are extremely sensitive to the initial date chosen for the timeframe of the plot. The earlier the initial date, the more bitcoin’s price will have grown during the timeframe. A HODL Cave going back to 2010, when bitcoin’s price was less than $1, shows 1000x better returns than the same plot going back to 2013, when the price was closer to $100.
Second, the far-right side of the plot represents holding bitcoin over the longest durations plotted and, as a result, there are fewer windows of such long durations within any given timeframe. For example, when plotting over a timeframe of 10 years, there are approximately 3,644 week-long windows but only one window of duration exactly 10 years (corresponding to having bought bitcoin on the first day of the timeframe and held it throughout). The number of windows being averaged together thus decreases linearly from left to right. As a result, the variance of data (height of the cave along the y-axis) on the far right of the plot is suppressed.
Finally, the biggest reason that exiting a decade-long bitcoin position for massive returns is a fantasy is that investors who have actually held bitcoin for a decade or more no longer think about exiting bitcoin. Morpheus said it best:
Bitcoin halvings occur every 210,000 blocks. In theory, this should be every 4 years, but in practice halvings tend to occur slightly faster. As a result of the halvings, bitcoin’s price goes through an approximate 4-year cycle of a bear market followed by a bull run. The HODL Cave plot neatly illustrates this market cycle.
This chart shows three periods of high volatility roughly four years apart, each following a halving.
The height of the plot at a given duration (the distance between the cave’s floor and ceiling) is a measure of the total spread of returns for that duration. Scanning the plot from left to right, the “cave height” shrinks and grows in a near 4-year cycle. The mean and median returns alternate between converging to and diverging from each other on this same cycle. The dizzying prices during bull runs followed by the big sell-off that starts the subsequent bear market creates volatility. This volatility diminishes over the following years as bitcoin enters a quieter period, a calm between such storms
Five-year holds showing little or no return have historically shifted positive after only slightly longer hold periods. On the other hand, five-year holds seeing exhorbitant returns could see a reversion back to the mean in the opposite direction.
Halvings thus cause cycles not only in bitcoin’s price but also in the volatility of that price and thus in unrealized bitcoin positions. This has practical consequences for investors. Bitcoin positions with large unrealized gains or losses that have been held for just under or over ~4 years (or ~8 or ~12) may soon revert back to the mean.
The “tops” of the HODL Cave, which repeat approximately every 4 years, are indicators that investors should “Watch Out!” for some downward market action. The “bottoms” are indicators that investors should “HODL!” a little longer. In both cases investors are relying upon the idea that unrealized gains/losses revert to the mean on a cycle.
Unchained today is proud to offer a full suite of financial services for bitcoiners, with custody, trading, retirement, inheritance, and lending products. But when we started our business, way back in 2016, we only planned to launch a single product: a bitcoin-collateralized US dollar loan.
We became the first company to offer regulated, secure bitcoin-collateralized lending to the broad market of US-based bitcoin holders. But because we were first to market, there were a lot of unknowns that we had to come to terms with. The HODL Cave plot helped us do this.
Collateralized lending typically limits risk using a loan-to-value (LTV) ratio. For example, a lender may offer a borrower $50,000 in principal if they provide $100,000 in collateral—this would be a 50% LTV. If the value of the collateral drops below some threshold, the borrower may be margin called, requiring them to post additional collateral or pay down some of the principal.
The higher the LTV, the easier it is for borrowers to obtain liquidity (as they can provide less collateral) but the more risky and costly the servicing process as margin calls become more likely. In the HODL Cave, the LTV of a particular loan can be thought of as a kind of “water level”. If LTV is too low, the cave is dry, and nothing floats; borrowers will not be incentivized to take loans because the collateral requirements are too severe. If LTV is too high, then the cave is flooded and borrowers & lenders both drown in the risk of too many & frequent margin calls.
Visualized as a water level in the HODL Cave, our LTV is 40% for all new loans.
When we first made the HODL Cave plot in 2016, we used it to set a 50% LTV ratio. We felt that LTV provided the right balance between value, cost, and risk between Unchained, our borrowers, and our lending capital providers. 50% LTV quickly became an industry standard.
As bitcoin matured through another market cycle, we revisited our analysis. In 2021, we examined the changes in topography of the HODL Cave since 2016 and decided to lower our LTV to 40% for all new loans we originated. Connecting to an earlier point about the periodicity of volatility, we drained the water level because we felt the market was in a “Watch out!” zone.
This proved to be a wise decision. By limiting the risk we and our clients took on we collectively survived the bear market of 2022 with no loan losses and fewer liquidations.
The HODL Cave illustrates the spread of returns for holding bitcoin over fixed durations. If you have held bitcoin over some duration, you can use the HODL Cave to visualize how your returns compare to other investors who held for the same duration.
But the shape and topography of the HODL Cave depends sensitively on the timeframe over which you choose to plot it, especially for longer durations. As discussed in the “Exit fantasy” section above, the earlier the start date and the longer the time frame, the more historical price appreciation bitcoin has experienced and the more variance in the ultimate returns shown in the corresponding HODL Cave.
If you’re trying to compare your bitcoin returns to the market’s, it’s therefore important to pick a time frame for the HODL Cave that matches your own experience with bitcoin. For example, if you first heard about bitcoin in 2017, your HODL Cave should be plotted using a time frame from 2017 to the present. This plot will now show your own personal bitcoin journey over the past few years and allow you to more fairly compare your returns to other investors in your cohort.
To aid you in plotting your own personal HODL Cave, we’ve created the animation above. It begins at the present and the start date of the time frame animates backwards all the way back to 2010. To use this animation, scroll to the frame which most closely matches the time frame of your own bitcoin experience and use the HODL Cave you see there to plot your own journey.
Plug in the mean return for your cohort from the video above and use the widget below to tweet your experience!
For example, in the below custom chart showing the returns for bitcoin holders in the 2017 cohort, you can see a few interesting things:
The cohort of bitcoiners formed in 2017 are seeing bitcoin's volatility, but they're also clearly experiencing its longer-term growth.
If you’re a class of 2021 bitcoiner, the cave for your cohort is a treacherous one indeed. You’re most likely underwater. Still, the HODL Cave can help paint a picture as to how you might want to spelunk from here:
The 2021 cohort, like all cohorts formed during bitcoin's speculative manias, are mostly sitting underwater for now.
Like bitcoin class of 2017 and 2021, everyone has followed their own path through their own HODL Cave. What does your path look like? You can use the video above to create a visualization of your journey. Share it with us on twitter using the widget below and attach an annotated image if you wish—we’d love to see it!
Big thanks to countless bitcoiners who provided feedback for the HODL Cave over the years, and thanks to Rocky Roark for the incredible illustrations that bring the HODL Cave to life!
This article is provided for educational purposes only, and cannot be relied upon as tax or investment advice. Unchained makes no representations regarding the tax consequences or investment suitability of any structure described herein, and all such questions should be directed to a tax or financial advisor of your choice.
