It has a weird name – ‘Bitcoin Days Destroyed’ and you might have seen it mentioned in the headlines a few times if you follow crypto news closely. What is it? To understand the term, we must look at the problem it tries to solve.
On 21 December 2013, there were 134,084,959 ‘Bitcoin Days Destroyed’ on the Bitcoin Blockchain. What did it mean?
If you looked at the number of transactions on the Bitcoin network and saw that it was growing every day, you might think that more people are using Bitcoin now. You might be wrong.
Just looking at the number of transactions does not show you the real ‘activity’ of Bitcoin. How?
Suppose you just moved your Bitcoins from one address to another address for privacy reasons. Even though it was a transaction, there was no real economic activity there. Right? This is the problem.
There are so many Bitcoin transactions like this. If someone just sent 10 BTC back and forth 20 times, from two addresses, it will look like 200 BTC worth of transactions, but again, all it really is just ‘noise’. The statistics are lying to you.
What if there was a way to remove that ‘noise’? A way to remove from the equation those very small but frequent transactions that happen when people are just shuffling coins? What would that achieve?
If we could do that, we would be able to get a better idea of the economic activity on the Bitcoin network. How would we go about doing that?
We would want something, which gives weightage to the age of coins (since it was last used) and obviously to the number of coins moved.
‘Bitcoin Days Destroyed’ is the metric that can remove that noise. How does it do so? Well, let us look at how it is calculated.
Bitcoin Days Destroyed = Number of BTC in a transaction X Number of days it was unused
If you have 100 BTC that you have not spent in 100 days and you decide to spend it all today.
Bitcoin Days Destroyed = 100 BTC X 100 Days = 10000 Bitcoin Days Destroyed.
Another way to understand it is - If there is a Bitcoin not spent for a day, then it ‘builds up’ one ‘Bitcoin Day’ which is ‘destroyed’ if you spend it.
Now, because this metric gives equal weightage to the days and the coins, 1 BTC spent after 100 days will have the same Bitcoin Days Destroyed as 100 BTC spent after a day. That is okay.
If you see a high Bitcoin Days Destroyed (BDD) one day, it means that a large number of old coins are moving or someone with large number of Bitcoins is using them or both. It gives an idea of the maturity of the coins moved, how often they are moved and in what amounts.
That’s it. That is what Bitcoin Days Destroyed is all about!
There are situations where this metric might also fail us. For example, a situation where someone really is engaging in real economic activity and doing many transactions but it would show up as low BDD or if a ‘Bitcoin Whale’ decides to move their old coins to a different address which would show up as a high BDD but without any commercial activity taking place.
It is not perfect but it does show a clearer picture of the activity happening on the blockchain.