Experts of the crypto market still have no common opinion as to which factor has the greatest impact on the price of Bitcoin. Some researchers are sure that these factors are mining and hodling, which have the effect of the opposing "energies" yin and yang on Bitcoin. Why have experts come to this conclusion and where does PPR come in? Let us understand it all in our material.

Who Needs PPR?

The product price-performance ratio (PPR) is a parameter that shows the price to performance ratio of a product. Often, PPR is necessary to illustrate the differences between past products and innovative developments. "Ordinary" products can show increasing PPR, and new ones can show lower values. The fact is that the production of new technologies is always inefficient at first, and it usually gains momentum later.

What are the factors that have the greatest impact on the PPR coefficient of Bitcoin? It is likely that the phenomenon of long-term storage of Bitcoin and the process of mining and its attendant factors affect the price of Bitcoin. Therefore, we will try to prove that they exert not only strong but also determining effects on the cost of the first cryptocurrency.

Yin (Hodling)

A few months ago, Unchained Capital published a work on a phenomenon called "Hodl Waves." The main know-how of this research was a cyclical picture of the increase of hodling after each take off of the Bitcoin price.

"Today, after the rise in 2017 and the fall in 2018, the share of Bitcoins, which were mined more than 12 months ago, has dropped to 40 percent. After every big takeoff, there was a big HODL. As the data shows, one more generation of long-term hodlers is being formed. Starting from January 2018, the category of Bitcoins aged six to 12 months recovered from a minimum of 7.76 percent to 14.63 percent. It will be interesting to watch this new wave of hodling over the next few months or years. How much older will the average Bitcoin be before the cycle begins? How many more hodlers will there be in the future?" asks the article.

Let us try to better understand the effect of hodling by determining its lower and upper limits. To this end, we are going to refer to a mental experiment. In our imagination, some users never spend their coins at the time of receipt. PPR for them can be defined by the following expression:

PPRb—PPR for block at height b; Rb—reward for block at height b; Hi—expected number of hashes at height i.

On the contrary, other participants in our mental experiment are largely the miners who create new blocks but never exchange their Bitcoins. Their goal is simply to transfer their wealth to this digital value store and keep it there forever.

Thus, PPR for them will look like this:

Now, let us build our PPR diagram with two boundaries defined by the first and second groups:

The PPR graph
The PPR graph. Source.

Interestingly, immediately after its creation, Bitcoin behaved almost as shown in the lower graph. Obviously, hodling played an active role in the evolution of system efficiency over the last nine years.

Yang (Mining)

Now consider the effect of mining on the price of Bitcoin. For this, it is necessary to construct a graph showing PPR and the expected number of hashes associated with the PoW of past blocks.

The PPR chart and the expected number of hashes
The PPR chart and the expected number of hashes. Source.

The diagram shows a series of cyclic patterns consisting of four phases:

A => B / A '=> B' (a few months to half): the growth of hashrate and PPR.

B => C / B '=> C' (about half): hashrate growth and decrease in PPR.

C => D / C '=> D': the market price begins to rise. The growth of the hashrate and PPR is increasing again.

D => A / D '=> . . . there is a "bubble.” There is a growth in the hashrate, PPR is again reduced until a new cycle begins.

With the help of the graphs we constructed and the data obtained from them, we can say with great confidence that the cost of hodling, mining, and the price of Bitcoin have a clearly traceable relationship. Moreover, since often miners and hodlers are "pulling the blanket" both ways, the effect on the price dynamics of Bitcoin turns out to be diametrically opposite, which can lead to the most unexpected outcomes in the future.