Reserve Risk has been mentioned before, and this article will explain its related functions.
Explain briefly again
Reserve risk is a cyclical indicator that tracks the balance of risk and reward relative to long-term holder confidence and commitment.
It mainly uses the relationship between "market price", "user liquidation behavior" and "user holding behavior" to define indicators. However, many of its data require the use of UTXO. It can be said that the reserve risk is specially designed for UTXO type chains. index.
(The calculation of Reserve Risk requires the use of CDD, and the use of CDD requires the use of UTXO, so students who do not understand CDD please read ahead. Thank you)
Fundamental:
1. Each unused UTXO will accumulate the length of sleep time. This is a great tool to measure the confidence of strong currency holders.
As the price increases, the incentive to sell and make a profit also increases (sell motivation).
At this time we will see some currency holders begin to sell their coins in a bull market.
But at the same time, there are also determined currency holders who are unwilling to sell. This collective behavior will accumulate an "opportunity cost."
Every day a coin holder actively decides not to sell increases the accumulated unused “opportunity cost” (called coin bank).
2. Reserve risk is calculated as the ratio between the current price (the incentive to sell) and the accumulated “opportunity cost” (the bank holding the currency).
In other words, reserve risk compares the incentive to sell versus the strength of holders to resist the temptation.
This indicator is an oscillatory state that can be seen as oscillating with the macro bull/bear market cycle.
It has clear peaks at tops and longer periods of relative undervaluation at bear market bottoms and early bull markets.
We can think of it this way:
1. When the confidence of currency holders is high, the accumulated opportunity cost (coin-holding bank) increases, and the price is low, the reserve risk is low, so the investment risk/return is relatively considerable.
Low reserve risk may indicate a relative undervaluation of market capitalization, typically ranging from late bear markets to early bull markets.
2. When the confidence of currency holders is low, the accumulated opportunity cost is reduced, and the price is high, the reserve risk is higher, and the risk/reward ratio is unattractive at this time.
High reserve risk may indicate relative overvaluation, with higher prices having a compounding effect that increases the incentive to sell, realize profits, and often include a mid-to-late bull market, followed by a rapid reversal after the top.
Reserve risk is calculated as follows:
Step 1: Calculate the value of coin days destroyed (VOCDD)
The calculation of reserve risk begins with a derivative of the supply-adjusted CDD metric, called VOCDD, which calculates the dollar value of all supply-adjusted CDD on a daily basis.
Value of coin days destroyed (VOCDD) = ∑ (price[USD] × supply-adjusted CDD) (daily sum)
Step 2: Calculate currency holding banks
Every extra day a holder holds a coin delays the ability to redeem it for cash value.
This postponed opportunity cost represents the confidence of currency holders and can be viewed as the overall “unused opportunity cost.”
Quantify this by looking at the difference between the current price (the incentive to sell) and the median VOCDD (the actual payout), giving you the “opportunity cost” of the remaining unused value.
Note: We take the median of VOCDD, that is, the VOCDD with extreme values removed, to filter out trading anomalies that may not have economic significance, such as the merger of a large number of coins within an exchange.
The holding bank indicator is the cumulative unused opportunity cost of assets held in the market. Coin holding banks are calculated as the lifetime cumulative sum of the difference between the daily price and the median VOCDD.
Holding Banks = ∑ (Price – Median VOCDD) [USD] (Lifetime Cumulative Sum)
Step 3: Calculate Reserve Risk
Reserve risk is calculated by taking the ratio between the current price (the incentive to sell) and the holding banks (the accumulated unused opportunity cost).
Reserve risk = price [USD] / holding bank
This results in a reserve risk value that reflects the current market risk-reward balance.
Reserve risk is a powerful cyclical indicator, showing the relationship between global confidence in holding the asset and the current price (the incentive to realize profits).
Using opportunity cost as the denominator, the weight of confidence among long-term holders increases over time as the coin remains dormant.
Two phenomena will occur:
Periods of undervaluation are typically longer and often include the second half of a bear market and extend into the first half of a bull market.
Based on historical performance, a reserve risk ratio below 0.0026 is empirically considered an undervalued area.
Periods of overvaluation are typically brief and sharp, due to the compounding effect of higher prices and subsequent incentives for long-term holders to realize profits and spend older coins.
Judging from historical data, reserve risk ratios above 0.0200 are considered an overvalued area, which usually only occurs briefly at the top of global markets.
Since the numerator is price, the magnitude of the change in the reserve risk ratio changes exponentially.
How to reduce storage risks?
1. Price decline: A price decline will have a larger negative impact on reserve risk because the price is in the numerator of the ratio.
Therefore, a bear market will drive down reserve risk indicators.
In the chart below, the red area shows the main negative impact of price on reserve risk.
2. High currency holding banks or increasing currency holding banks: The increase in currency holding banks (that is, opportunity cost) will reduce reserve risk.
This means that a higher price is needed to incentivize currency holders to sell.
When an asset is in the accumulation phase and/or held for the long term, unused opportunity costs will begin to accumulate as coin-days are destroyed (again, CDD). This increases the magnitude of the currency holding banks indicator, making the denominator larger and suggesting higher global confidence. This will result in a decrease in the reserve risk value.
In the chart below, the yellow area shows the impact of holding banks’ reduced reserve risk when prices trade sideways.
This kind of market behavior is common from the end of a bear market to the beginning of a bull market, and smart investors tend to buy cheap coins.
What are the conditions that in turn increase reserve risk:
1. Price increases: Price increases will have a greater positive impact on reserve risk, so a bull market will increase reserve risk indicators.
2. Low currency holding banks or declining currency holding banks: A decline in currency holding banks will increase reserve risk exponentially. After all, the denominator becomes smaller, which usually occurs at the same time as the price rises (larger numerator). This means that the price is sufficient for currency holders to realize profits and spend the accumulated opportunity costs.
(Using opportunity cost to explain is more intuitive, but not accurate enough. Using currency-holding banks to describe it is more accurate, but not intuitive. Well, you will remember it after reading it a few times, and I will not remind you repeatedly in the future)
Did you find anything interesting here?
When the price is higher, that is, the numerator is higher, the savings risk will also increase. However, because the higher the price, it will also cause the currency holding bank to decrease, and the savings risk will also increase.
The upward impact on reserve risk by reducing currency holding banks can be deduced.
When more coins are sold and returned to the market, the age of the UTXO is recalculated (especially for large amounts). This increases the total coin age destroyed (CDD) at higher prices, raising the median VOCDD (dollar value destroyed per coin day), thereby reducing coin holding banks.
Given that this behavior typically occurs at high prices, CDD and price inputs to VOCDD will have a compounding effect on reserve risk
That is to say, when the normal high becomes an accelerated high storage risk, the price support becomes precarious.
vice versa.
This also explains the four states of savings risk: normal high, accelerated high, normal low, and accelerated low.
But unlike low savings risk, low reserve risk can be a long, slow, and persistent event.
An upward change in savings risk can easily trigger exponential and rapid changes. This is easy to understand.
After all, the ability to tolerate risks decreases when the price is high, and it is easier to be patient and endure it slowly when the price is low.
Usually the spending behavior of institutions or long-term holders is common in mid-to-late bull markets, where such investors will reduce their holdings and sell relatively expensive coins, as shown in the green area in the chart below.
My favorite exchanges
Paiwang, the first choice for quantitative trading, is also where I use fixed deposits.
https://www.pionex.com/zh-TW/signUp?r=kfKGa6PF
### Binance Exchange
The world's largest exchange with the most functions, the group has a complete currency ecological chain, the platform currency rises rapidly, and is less disconnected, the control of deposit and withdrawal is relatively strict, it takes 24 hours to withdraw the currency after buying, and the risk of freezing the card is low.
https://accounts.binance.com/zh-CN/register?ref=XFRGMUKF
###OKX Ouyi
After years of bulls and bears, a stable exchange that has always been cultivated slowly, is an exchange with high security
https://www.okx.com/join/4506538
### SesameGate.io
There are a lot of initial coins, and the threshold for grabbing the first coin is relatively close to the people. Only VIPs can buy it. It is also a good place to mine the wealth of new coins. The NFT sector is quite rich and comes with quantitative trading functions. The functions are very rich and it is easier to make money , but it is also easy to encounter garbage coins, so keep your eyes open
2021/5/20 GTEVM starts to go online and will also enter the field of smart contracts