The bitcoin blockchain is a distributed ledger that anyone can view and verify with or without a third party. You can choose to use a public blockchain explorer and trust the data they pull from their node, or you can run your full bitcoin node, download a full copy of the bitcoin blockchain and verify everything yourself.
The ability for anyone to verify a network, its holdings and where bitcoin is moving, and at what price would naturally appeal to the curious data analyst. Today we have on-chain analytics and on-chain analytics companies all mining data from the blockchain to provide updates on the so-called “health” or “growth” of the network or, more ominously, trying to de-anonymize the network’s user base.
One of the metrics analysts like to track is the number of inactive addresses on the chain, how much bitcoin these inactive addresses hold, and whether they become active at later dates.
Now that the bitcoin-to-fiat market is worth billions, interest in keeping an eye on these addresses is increasing, as an inactive address with a substantial amount of coins could move the price if that user decided to sell.
Over the last decade, people’s wallets have been created, and found, lost, confiscated, forgotten, recovered, and while the balance of bitcoins may remain the same, the purchasing power represented in the price in fiat has changed.
Today there are bitcoin wallets containing billions of dollars in BTC just hanging around with no intention of moving/ For one reason or another; the wallet has not transacted for years despite holding what is considered life-changing money.
These addresses are often referred to as dormant addresses.
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What is considered an inactive bitcoin address?
An inactive bitcoin address refers to addresses with no outgoing transactions for a certain period with a non-zero balance. Depending on your preferred time frame, a dormant address could be considered inactive if no funds have moved in or out of that address for a year or more.
Someone holding bitcoin for a year may just be starting to get a feel for it; they may be planning to hold it for a cycle to sell it at the top, so considering it inactive seems like overkill, in my opinion. I prefer to look at directions that have held for several cycles and consider them dormant.
If they are immune to the falls and rises of the bitcoin price during any cycle, they are either incumbents, dead, or in jail.
Below is a chart of inactive addresses and the amount of bitcoin held on the chain by these addresses over nine years.
Now that we know what inactive addresses are and how to identify them, let’s look at some of the reasons why addresses go quiet.
Some of the big wallets are from the early days of bitcoin; they might have mined those coins or bought them through P2P merchants or in the early days of exchange and held on to them in some way.
The early holders who invested in the asset and kept their holdings have become bitcoin whales, and those alive to spend that money have either started companies to further the growth of the space or gone off to enjoy an early retirement; who knows?
Over the past few cycles, a growing cohort of bitcoin maximalists has emerged; they simply dollar-cost average and acquire bitcoin, and plan to store it for the long term. These “hodlers” store their bitcoin on the blockchain, they are the sole owners of the keys, and since they have no plans to spend the bitcoin, those wallets don’t see much action.
I do not think it needs a lot of explanation, users who have lost their keys or who have not made a backup while they are alive or dead lose access to these parts forever. If that private key is never recovered, those coins will remain lost and can never be moved.
Certain financial transactions with bitcoin could be considered illegal by governments and law enforcement, and in these cases, the coins can be confiscated. Some coins could be used as evidence in court cases that could last for years and therefore remain dormant until the governments holding them finally decide to do something with them, such as auction them.
Stolen coins are mostly due to incidents such as account hacking, but some could be the result of physical attacks, where someone has broken into your home and taken your private keys or forced you to hand them over. Once these addresses have been reported to the authorities, the holder knows that they are constantly under surveillance, and some tend to leave the addresses inactive in an attempt to avoid investigations.
It should be noted that in recent years, despite the anonymity of bitcoin, investigators have managed to track stolen funds by following their movements from one address to another. Stolen coins could become active again if the holder believes he has a way to liquidate some of the bitcoin without it being linked to him or if authorities track him down and move the bitcoin from that set of keys to another.
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Now that we have second-layer solutions like the Lightning Network and the Liquid Network, the bitcoin on the chain doesn’t always have to be moved to facilitate transactions. Certain bitcoin addresses may hold bitcoin for a while, even years, but in the meantime, they move around other networks paying users and facilitating transactions.
The growth of second-layer solutions is one reason why I don’t think a year-old address can be considered an inactive address.
Currencies used as collateral
Again, the emergence of new bitcoin use cases makes the length of the inactive address a concern. We have a growing market of users willing to lock up their bitcoin in multi-sig addresses and use it as collateral to secure a loan. The bitcoin does not move until the loan is repaid with the agreed interest.
Typically, bitcoin-backed loans have a duration of 1 to 2 years, so even though these funds may be considered dormant, they are actively backing a deal with different parties.
Don’t turn your wallet into a flashy address
If, after reading this, you’re thinking that I have my bitcoin on the blockchain and my public address isn’t doing anything, won’t they be watching me? The short answer is yes; your funds are considered inactive regardless of the size of the funds in the public address.
As a responsible holder of bitcoins, your job is not to consolidate your bitcoins into a public address, or one day you’ll move; your coins could be flagged by individuals or bots watching the chain and enforcing certain sets of rules.
Instead, create a new public key from your seed phrase each time you retire on the chain, and while each address could eventually be considered an inactive address, you’d never be in danger of seeing your coins watched by others as it moves to an exchange to be sold.
Do you have custody of your stack yourself?
If you’re new to bitcoin and haven’t ventured down the self-custodial rabbit hole, what’s stopping you? If you’ve already self-custodied, what has the experience been like since you got your hands on your funds?